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Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
Absolute Software 2008 Annual Report
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Absolute Software 2008 Annual Report

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2008 annual report for Absolute Software Corporation (TSX: ABT), the leader in computer theft recovery, data protection and secure IT asset management solutions. Absolute Software provides …

2008 annual report for Absolute Software Corporation (TSX: ABT), the leader in computer theft recovery, data protection and secure IT asset management solutions. Absolute Software provides organizations and consumers with solutions in the areas of regulatory compliance, data protection and theft recovery. The Company's Computrace software is embedded in the firmware of computers by global leaders, including Acer, ASUS, Dell, Fujitsu, General Dynamics Itronix, HP, Lenovo, Motion, Panasonic and Toshiba, and the Company has reselling partnerships with these OEMs and others, including Apple. For more information about Absolute Software and Computrace, visit www.absolute.com and http://www.absolute.com/blog.

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  • 1. More than you think. Absolute Software | 2008 Annual Report
  • 2. During its 15-year history, Absolute Software Corporation has secured mobility for millions of subscribers and established itself as the leader in computer theft recovery, data protection and IT asset management.
  • 3. But there’s more…
  • 4. moreLeadership Fellow Shareholders, Fiscal 2008 was another solid year of growth for Absolute as we continued to fortify our industry leadership position. We built new partnerships, developed new technology, expanded our customer focus, enhanced the team, and rolled-out a global customer service strategy. These initiatives resulted in robust growth across all of our key fi nancial metrics. We more than doubled our subscriber base to over 3.3 million computers, increased sales contracts 53, grew cash from operations to $30 million and shipped our unique “Anti-Theft” persistent firmware module on an estimated 50 million notebooks. Now, with a seasoned team, Absolute’s anti-theft “software as a service” platform is positioned for worldwide growth. Adding Value Beyond Theft Protection Absolute invented and remains the undisputed leader in the “Anti-Theft” or computer theft protection market. Absolute’s products have also matured into a sophisticated pre-theft security and management toolset, delivering best practices for “off-LAN” secure computer tracking. Absolute’s tamper-resistant embedded computer tracking system helps customers proactively deter computer theft, drift, shrinkage and plug potential network security vulnerabilities. Post-theft, Absolute’s unique, programmable and persistent computer security tracking system enables our customers to take a broad range of emergency response actions when devices and data become lost or stolen. These include a compelling auditing and remote forensic reporting capability which gives the customer insight into the nature of any unauthorized data breach on the mobile device. We also provide confirmation of whether or not any private and confidential data was actually accessed or, if applicable, whether the encryption program was successful in protecting the data against compromise. Th is enables the customer to better assess their data breach reporting obligations and helps give a deeper and more confident position of compliance with several data privacy rules. In 2008 Absolute delivered new, innovative products and features designed to address changing customer requirements. For commercial customers, we added a new dimension to computer asset management with the ability to track computers and visually display their location using Google mapping technology. In addition, we launched a post-theft file access audit feature to enhance our remote data delete service, and made numerous enhancements to our management and reporting features. In response to growing concerns over identity theft, we also launched Computrace LoJack for Laptops Premium — which delivers commercial level remote data delete capabilities to the home user. These broadened capabilities build upon Absolute’s foundation in the computer theft recovery and data protection markets. Customer Loyalty In fi scal 2008, we grew our subscriber base by 110, ending the year with more than 3.3 million computers under subscription. Th is subscription base represents a recurring revenue opportunity, as nearly 60 of this year’s sales contracts came from existing customers. We consider this a testament to both the quality and consistency of service that Absolute provides. Many of our customers rely on our persistent tracking system for day-to-day policy and compliance management, inventory control and vulnerability assessment. The persistence and “off-LAN” features of our system, offers a unique and complementary capability to other asset management systems. With these services, most of our customers have experienced a reduction in computer loss and drift rates through tracking, recovery and deterrence, and have thus reduced their exposure. This in turn has helped them to confidently adopt mobility and maximize the efficiency of their workforce. Much of this value and “sticky” customer base is made possible by our unique computer theft recovery capabilities. With more than 750 collective years of policing and high tech crime experience, our team has successfully fostered relationships with police departments worldwide, facilitating our unique ability to successfully recover missing computers. 2
  • 5. Mobility, Legislation and Awareness Fuel Demand The key demand drivers for Absolute’s products and services continue to gather momentum. Global notebook shipments increased 37.6 in Q2 20081, data privacy legislation is prevalent at both the state and federal government levels, and industry leaders like Intel are now evangelizing “Anti-Theft”. According to the Computer Security Institute’s annual study, laptop and mobile device theft was experienced by fully 50 of security professionals2. All these factors increase demand for theft deterrence, computer theft protection and data protection solutions. The message is clear: mobile computing requires layered security measures to deal with identity theft and data privacy breach issues. Because the source of much theft is internal, measures must move beyond, and supplement, conventional solutions such as encryption. Absolute’s Computrace is the ideal complement to encryption; it allows customers to forensically audit the data breach remotely, protect the private data in certain scenarios where the unauthorized user may have access to the password, and recover the stolen device — revealing the source of internal theft in the process. These essential services are well beyond the scope of most conventional security solutions. A New Era of Industry Partnerships Absolute has built OEM partnerships with the world’s leading computer manufacturers. Still, Absolute’s services are only activated on approximately 7 of new notebooks shipped in the United States. With “Anti-Theft” potentially becoming a global computer security standard, there is clearly room for additional growth. Our ability to innovate and adapt our solutions to meet the needs of our partners is another critical key to driving service adoption. The development of Computrace to work with Qualcomm’s Gobi global mobile Internet and GPS platform is a good example as it allows our data protection and theft recovery to be delivered closer to real time. Our collaboration with Intel also underscores our strengthening leadership position. With Absolute’s suite of solutions, customers will also be able to access the anti-theft layer available for notebooks employing Intel’s upcoming Centrino processor. In the coming months, through targeted promotional campaigns, we expect Intel to further evangelize the under-penetrated anti-theft market. Absolute Growth The fundamental condition of our business and finances, and the caliber of our leadership team have never been stronger. The breadth, maturity and stability of our strategic partnerships, unique recovery team, growing customer base, proven track record, patented tracking, recovery, persistence and embedded technologies and our new Microsoft® Windows™ mobile-based offering provides us with a true sustainable competitive advantage. With a balance sheet that has more than $64 million in cash and investments, no debt, and strong cash flow margins, we have the foundation in place to execute on our strategic growth plan. In closing, I would like to extend a sincere thank you to our employees for their innovation and tireless work, our board of directors for their guidance and our shareholders for their support. I would also like to thank our customers and partners for placing their trust in Absolute to help them manage their mobile security needs and for being ambassadors for our services with industry observers, media and prospects. We look forward to reporting on our progress in the coming year. Sincerely, John Livingston Chairman and Chief Executive Officer 1 IDC Worldwide PC Market, 2Q08 Review 2 Computer Security Institute, The 12th Annual Computer Crime and Security Survey, 2007 3
  • 6. moreMomentum Global laptop shipments increased Individuals from all walks of life want access to 37.6% to 31.6 M units in Q2 2008.3 information and data at anytime from any location. The desire to access files and information for work Laptops are expected to account for or pleasure on this basis continues to drive the 66% of corporate and 71% of consumer adoption of laptops and other mobile devices. computer purchases by 2011.4 Every 50 seconds a laptop goes Widespread adoption of laptops and missing — and that’s just at U.S. airports.5 mobile devices has liberated users; however, it has also created challenges related to $6.3 M is the average cost to organizations protecting the asset and the data it contains. for each reported data breach incident.6 In addition, organizations with large laptop populations need to track where their assets are More than 245 M data records and what applications they contain on a daily of U.S. residents have been exposed due basis. Doing so can result in substantial cash to security breaches since January 2005.7 savings from proper software license compliance and effective deployment of computers As much as 20% of software licensing throughout the organization. and hardware maintenance charges are incurred for assets that are no longer in use.8 3 IDC Worldwide PC Market, 2Q08 Review 4 IDC Worldwide Quarterly PC Tracker, April 16, 2008 5 Ponemon Institute, Airport Insecurity: The Case of Lost Laptops, 2008 6 Ponemon Institute, U.S. Costs of a Data Breach, 2007 7 Privacy Rights Clearinghouse, www.privacyrights.org 8 Gartner inc., “Don’t Overlook Opportunities to Save Costs on ITAM”, Jack Heine, Frank DeSalvo, Frances O’Brien, March 2008 The Gartner Report(s) described herein, (the “Gartner Report(s)”) represent(s) data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Prospectus) and the opinions expressed in the Gartner Report(s) are subject to change without notice. 4
  • 7. States now have legislation requiring notification of security breaches involving personal information. The proliferation of laptops and the presence of private and confidential information contained on them means that corporations and governments must have a strategy in place to protect their assets and data. Negative publicity and a damaged reputation, along with lawsuits, fines and other out-of-pocket costs, may impact organizations that fail to have adequate measures in place to protect against loss or theft of their confidential data. 5
  • 8. morePartners Intel announced its anti-theft platform initiative, which included Absolute as a collaborative partner. Partnership with Qualcomm to develop anti-theft and data protection services for their Gobi 3G module that enables real-time anti-theft and data delete services with any network carrier and across multiple PC OEM platforms. Partnered with Digital River to support Absolute’s online sales strategy and drive new and renewal sales for retail consumers. Best Buy Canada offers Absolute’s Computrace software in-store as well as through its Geek Squad 24-hour in-home and in-office computer support services. 6
  • 9. Absolute has partnered with more than 20 of the world’s leading PC OEMs, retailers, value-added resellers, system integrators, software providers and chipset manufacturers. Absolute’s Computrace software is embedded in the BIOS/Firmware of computers from the world’s leading PC OEMs. As a result, nearly 50 million laptops will ship ‘Computrace ready’ in calendar 2008, bringing Absolute’s total embedded footprint to over 100 million laptops worldwide. A continued focus on working directly with its OEM partners to launch new bundling and marketing programs will serve to expand this presence even more. Absolute has partnered with Digital River to help manage new consumer sales and renewals, and has expanded its retail partner network to include: costco.com, circuitcity.com, Best Buy Canada and Future Shop.
  • 10. moreInnovation Pre-theft Absolute is well known as the standard for theft recovery and data protection of mobile computers. A lesser known fact is that Absolute also plays an important role in helping companies manage their computers pre-theft. Absolute’s technology enables customers to centrally manage and secure their entire remote and mobile computer populations. In addition to ensuring an accurate inventory of a company’s IT assets, Absolute’s solutions are effective at improving productivity and reducing computer shrinkage. These benefits help demonstrate accountability for IT spending and ensure compliance with corporate and government regulations regarding data privacy. “We literally had 10 people with “Absolute immediately gave us “IT asset management is a top barcode scanners attempting to visibility into our laptop population. priority for Grant Thornton. We are find 12,000 computers. It was a We can see where the laptop is, who achieving asset management accuracy great effort. With Computrace, is logging in and what software is of 99.7… resulting in considerable we always know where our installed. It also allows us to verify cost savings.” computers are. What was once that the laptop’s encryption is up a three-month process is now as to our standard — which is key for Dave Johnson simple as running a five-minute regulatory compliance.” Director, IT Strategic Services report that is more than 99 Grant Thornton accurate. That is accountability.” Brad Myrvold Manager, Desktop Technology Thuan Nguyen Allina Hospitals & Clinics Director, Information Technology Kent School District 8
  • 11. Lease Management Most organizations that lease their computers struggle with locating mobile PC’s when leases Enhanced Productivity expire and computers need to be Absolute’s inventory management turned in. For those organizations tools enable IT departments with thousands of computers to centrally manage their entire deployed, the challenge is Theft Deterrence remote and mobile computer substantial. Absolute’s solutions Absolute’s computer population by monitoring computer provide IT managers with a recoveries have resulted in movement, call history, asset suite of tools ideal for keeping numerous internal theft rings leasing information, software track of remote and mobile being exposed. With more licensing and hardware computer assets. Changes in than 60% of data breaches add-on compliance. 9 asset information are relayed resulting from “internal causes”, on a daily basis ensuring timely organization-wide knowledge and accurate management of of installation of Absolute’s computer populations. solutions can deter and reduce internal theft. Benefit: In addition to reducing the costs associated with replacing missing hardware, theft deterrence Benefit: Automatic and substantially cuts the security centralized asset management risk of a data breach and helps can improve productivity — and ensure compliance with privacy save money— dramatically by regulations. On average, reported refining the deployment of a theft rates from organizations that company’s remote and mobile use Absolute’s solutions are less computer fleet and ensuring than 1%, compared to 3-5% for optimal allocation of software the industry in general. licenses. As well, it can ensure compliance with company policies by automatically detecting Benefit: IT managers using unauthorized software and Absolute’s solutions know where hardware installations. their computers are nearly 100% of the time. As a result, they are able to ensure optimal allocation of assets, timely lease renewals, reduced theft and minimized drift. 9 Ponemon Institute, U.S. Costs of a Data Breach, 2007 9
  • 12. moreInnovation Post-theft Absolute’s theft recovery and data protection services provide customers with peace of mind. The recovery team’s techniques and strong relationships with local law enforcement teams mean that customers can count on stolen laptops being recovered. To date, Absolute has returned more than 7,000 stolen laptops to their rightful owners. Remote data delete and data retrieval functions markedly reduce the potential for embarrassing and costly security breaches, and auditing capabilities can determine if a security breach has occurred. These features help ensure compliance with data privacy regulations. “We take many steps to protect “Absolute literally looked after “At Medical Edge, we believe our patients’ personal and health everything from the moment we let encryption and policy enforcement information, including stringent them know it (the laptop) was stolen are a good start, but provide no policies on storing protected to the point where we could go guarantee that the information is information on mobile computers. pick it up at the Surprise (Arizona) secured. With Computrace, our IT With our protected information Police Department. In the past, staff can remotely delete sensitive encrypted, and now the ability to we wouldn’t have had a chance of data on lost or stolen laptops and physically recover computers or recovering that laptop, but the sheer run post-theft forensics to know remotely delete information from speed with which it was found in if health information has been lost or stolen computers, we feel this case should be a major deterrent accessed on the missing computer.” we are doing everything possible to for would-be thieves.” William Chally ensure data security.” Evan Allred Chief Technologist Alison Wells Director, Information Technology The Medical Edge Healthcare Group Manager of Client Service Dysart Unified School District Community Medical Centers 10
  • 13. Forensic Auditing Comprehensive and defensible audit trails, produced by Computrace, can determine if Remote Data Delete a security breach has occurred Using Computrace, IT professionals on remote and mobile computers can remotely delete sensitive data and if files have been accessed; at the file, directory and/or operating if sensitive data has been lost or Theft Recovery system level. Computrace can stolen, its encryption status and Once connected to the achieve this on both desktop and the last known location of the Internet, Absolute’s software mobile assets, ensuring lost or computer itself can be determined. reports a stolen computer’s stolen computers are left clean location information to the and free of sensitive data. Theft Recovery Team, which works in conjunction with local law enforcement to recover it. Benefit: In addition to avoiding hardware replacement costs, Benefit: Remotely wiping laptop recovery can secure sensitive data can help an organization avoid the damaging Benefit: Absolute’s auditing confidential information — by publicity and potential litigation capabilities help ensure reducing the potential for an associated with an information compliance with government embarrassing and costly data security breach. It ensures data privacy regulations. breach — and help identify compliance with data privacy Currently, 44 states have internal theft issues. regulations and mitigates legislation requiring public associated costs such as notification of security breaches crisis communications strategies involving personal information. and credit monitoring. The ability to prove no breach occurred can reduce negative publicity, and the potential for liability and costs related to such an event. 11
  • 14. moreGrowth The accelerating global demand for mobile devices along with their growing capacity to manage, store and transmit data has Absolute well positioned to grow its business in three broad areas: (1) increasing its North American attach rate on laptops, (2) penetrating international markets for laptop and data protection and, (3) expanding its product and service suite and the mobile device platforms it serves. Absolute’s current attach rate on U.S. laptop sales is approximately 7%, with plenty of room to grow. Mobile Growth Strategy Absolute has recovered Computer-like functionality continues stolen laptops in: to drive smartphone adoption. At the • Argentina same time, concerns about protecting • Canada data on these devices are pervasive. • Costa Rica Absolute launched Computrace Mobile • England to capitalize on the steep growth • India momentum for smartphones, enabling • Iraq users to track their devices and avoid • Norway potentially embarrassing and costly • Saudi Arabia data breaches should they go missing. • United States 12
  • 15. Smartphones are the fastest growing segment of the mobile device industry (30% worldwide and 55% U.S. expected CAGR 2006–2011).10 International Growth Strategy Rapid laptop and smartphone adoption in Europe is prompting the same data privacy concerns and calls for regulation as in North America. With the launch of ComputraceOne in March 2007 and the establishment of UK- based operations, Absolute has invested in global expansion over the past two years to capitalize on growth opportunities in Europe and Asia and to deliver the same peace of mind and data security 10 IDC Worldwide Converged Mobile Device that its North American customers enjoy. 2007-2011 Forecast Update: June 2007 13
  • 16. morePerformance Increased Sales Contracts 53% (70% in U.S. dollars) to $72.5 million. Increased our subscriber base to 3.3 million customer computers, up 110% from June 30, 2007. Increased Increased cash, cash equivalents and liquid investments to $64 million, up 83% from June 30, 2007. Increased deferred revenue to $87.8 million, up 62% from June 30, 2007. Generated a subscription renewal rate of close to 100% with existing commercial customers. Generated cash from operations of $30.0 million, Generated up 78% from fiscal 2007. Generated cash margins of 41%, up from 36% in fiscal 2007. Reduced the operating loss, excluding investment tax credits Reduced and stock-based compensation, by 41% to $3.2 million. Achieved a milestone of 7,000 computer recoveries; Achieved ended the year averaging approximately 1,000 recoveries per quarter. Awarded a US$1.7 million order in the U.S. government market; Awarded a record-sized order for Absolute. Signed a collaboration agreement to make Computrace solutions Signed interoperable with Intel’s Anti-Theft Technology initiative. Collaborated Collaborated to create real-time capability for Computrace solutions on Qualcomm’s wireless Gobi platform. Launched a new security service for Windows Mobile devices, opening up a completely new market opportunity Launched for Absolute. Launched a beta version of its real-time data delete, asset tracking and theft recovery solutions. 14
  • 17. Sales Contracts Cash from Operations ($ millions) ($ millions) 80 30 70 25 60 20 50 40 15 30 10 20 5 10 0 0 05 06 07 08 05 06 07 08 Revenue Cash, Cash Equivalents & Investments ($ millions) ($ millions) 40 80 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 05 06 07 08 05 06 07 08 Deferred Revenue Subscriptions ($ millions) (millions) 100 3.5 3.0 80 2.5 60 2.0 40 1.5 1.0 20 .5 0 0 05 06 07 08 05 06 07 08 15
  • 18. Management’s discussion and analysis 17 Auditors report 35 Consolidated financial statements 36 Notes to consolidated financial statements 39 Corporate information 50
  • 19. Absolute Software 2008 Annual Report ABSOLUTE SOFTWARE CORPORATION Management’s Discussion and Analysis For the years ended June , ,  and  The following Management’s Discussion and Analysis (“MD&A”) is prepared in accordance with National Instrument 51-102F1, and should be read in conjunction with the Company’s Fiscal 2008 Consolidated Financial Statements and accompanying notes. These documents, along with additional information about the Company, including the Annual Report and Annual Information Form, are available at www.absolute.com and www.sedar.com. Certain statements in this MD&A constitute forward-looking statements that involve risks and uncertainties. These forward-looking statements relate to, among other things, worldwide legislative trends, rates of addition of new subscription contracts, adoption rates by users of certain brands of computer products, continuation of firmware support by OEMs, future adoption of firmware support by OEMs currently not doing so, the launch of bundling programs, the expansion of international markets, accelerated demand for products, plans and timing for the introduction or enhancement of services and products, and other expectations, intentions and plans contained in this analysis that are not historical fact. When used in this MD&A, the words “plan”, “expect”, “believe”, and similar expressions generally identify forward- looking statements. These statements reflect current expectations. They are subject to a number of risks and uncertainties, including, but not limited to, changes in technology and general market conditions. In light of the many risks and uncertainties, readers should understand that Absolute Software Corporation cannot offer assurance that the forward-looking statements contained in this analysis will be realized. Selected Annual Information (in millions, except percent and per share data***) Fiscal 2008 Fiscal 2007 Fiscal 2006 Sales Contracts reported* $ 72.5 $ 47.3 $ 22.5 % increase 53% 110% 70% Sales Contracts in constant currency** $ 80.4 $ 47.3 $ 21.9 % increase 70% 115% 84% Cash from Operations* $ 30.0 $ 16.9 $ 4.2 % increase 78% 302% 213% Per Share (basic)*** $ 0.64 $ 0.38 $ 0.10 Per Share (diluted) $ 0.60 $ 0.35 $ 0.09 Revenue $ 37.9 $ 20.1 $ 11.7 % increase 88% 72% 36% Operating loss before Investment Tax Credits and stock-based compensation $ (3.2) $ (5.3) $ (4.3) % decrease (increase) 42% (24%) (90%) Net loss after income taxes $ (8.4) $ (5.9) $ (3.9) Per share (basic and diluted)*** $ (0.18) $ (0.13) $ (0.09) Total assets $ 103.0 $ 63.0 $ 33.0 Cash, cash equivalents and investments $ 64.0 $ 34.9 $ 16.7 Deferred Revenue $ 87.8 $ 54.2 $ 27.0 Long-term debt $ – $ – $ – * Throughout this document we refer to “Sales Contracts” (invoiced sales) as a revenue measure, Cash from Operations and “Cash Margins” (Cash from Operations divided by Sales Contracts) as profitability measures, and “Basic and Diluted Cash from Operations per Share” (Cash from Operations divided by the average shares outstanding for the period (basic), and diluted calculated using the treasury stock method) as an earnings per share measure. With the exception of Cash from Operations, these are non-standard measures under Generally Accepted Accounting Principles (“GAAP”). We consider these non-standard measures to be our key performance metrics since substantially all Sales Contracts in each quarter are deferred on the balance sheet, while the majority of the related costs are expensed in that same quarter. Refer to the Business Model section below for more details. ** Sales Contracts in constant currency refers to the Canadian dollar sales that would have been reported had the average U.S. dollar exchange rate been unchanged from the average rate in fi scal 2007. With approximately 95% of Sales Contracts in U.S. dollars, management believes this to be a more meaningful evaluation of the underlying performance of the business. The average U.S. dollar exchange rate on our sales fell from $1.1521 in Fiscal 2006 to $1.1248 in Fiscal 2007, and then to $1.0131 in Fiscal 2008. *** On December 14, 2007, shareholders approved a two-for-one share split for its common shares effective as of the close of business on January 4, 2008. All share and per share information included in this MD&A has been adjusted to reflect this share split for all periods presented. 17
  • 20. Management’s Discussion & Analysis The words “we”, “our”, “us”, “Company”, and “Absolute” refer to Absolute Software Corporation and/or the management and employees of the Company. All dollar figures are stated in Canadian dollars unless otherwise stated. Business Overview As computing devices containing data, or having the ability to access data, have become more mobile, the demand for ways to access, control and protect those devices, and the information on them, has increased. Organizations and individuals have become increasingly concerned about the potential exposure of confidential data and networks from the loss or theft of computing assets that are particularly vulnerable in today’s mobile and remote office operating environment. Examples of individuals and organizations that have experienced the shortcomings of this movement through the loss of a mobile device have been numerous and well-publicized. The risk is severe, as indicated, for example, by a study recently sponsored by Dell (June 2008) which found that over 630,000 laptops are lost at U.S. airports each year. To look at another example, on July 21, 2008, ComputerWeekly.com reported that the UK Ministry of Defense is losing one laptop every two days. The computing industry considers protection of mobile devices and related data to be one of the top security issues to resolve – and one against which Absolute has been securing customers for over ten years. The problem increases with the increasingly large volumes of mobile computing devices in use and being shipped every year. Industry estimates expect mobile computing device shipments to continue growing, with an estimated 136 million portable computers shipping in calendar 2008 (IDC, March 2008), and 118 million smartphone devices shipped in calendar 2007 (Canalys Research Report 2008/021). Absolute’s mission is to protect our customers’ information and mobile computing devices from loss and theft, and to simplify essential tracking and management functions. With a subscriber base at June 30, 2008 of over 3.3 million customer computers, we established and developed the “Anti-Theft” market category over ten years ago and remain its leader. We have a proven track record for tracking and recovering lost or stolen devices, and for protecting sensitive data. As a result, we have become a vital component of the security strategy of many mobile computer users. We are also one of the pioneers of the Software-as-a Service (“SaaS”) business model which provides an opportunity for higher long-term profitability than traditional license/maintenance models, and for significant operating cash flows. With server applications hosted by the SaaS provider, the model also enables faster adoption/implementation for customers, simplifies day-to-day management and updating, and makes technology economically viable for customers of all sizes. The hosted SaaS model is also well-suited for our anti-theft type security services as it enables us to maintain control and ensure immediate emergency response to our customers’ security needs. When a laptop is lost or stolen, the owner is exposed to the loss of confidential and private information that can lead to identity theft, privacy breach and/or public embarrassment. The ability to respond immediately is critical, whether by property recovery or remote deletion of customer fi les, and our hosted services model ensures reliability of this service. This emergency response capability is an area of unique advantage for Absolute, as we continue to be the only provider of premium theft recovery services. Our theft recovery team uses our Computrace platform to conduct investigations and recover our customers’ lost and stolen computers. We have recovered more than 7,000 for our customers, and are currently recovering an average of approximately 1,000 per quarter. In the process, we have built a loyal following with customers and law enforcement agencies as we have solved a variety of crimes, including internal theft rings in large organizations which have also led to a reduction in overall theft and loss rates for those customers. From a regulatory compliance perspective, we can provide customers with the data and evidence required to confirm that sensitive data on their computers was protected post theft. In recovering customer computers, we are often providing valuable information about the level of risk, if any, that data was breached. In addition, our data delete solution includes an audit trail to confirm the data was eliminated and identifies whether any fi les were accessed post theft. This can often provide customers with enough evidence to comply with privacy legislation, without triggering notification requirements. 18
  • 21. Absolute Software 2008 Annual Report Performance Overview – Fiscal  Fiscal 2008 was a prosperous year for the business, which led to a mid-year increase in our subscriber base target to six million by June 30, 2009, up from four million. In addition, we increased our cash margin guidance to 40-43% in our third quarter, up from 30-35% at the beginning of the year. For fiscal 2009, we will continue to focus on our six million subscriber base target and a 35-40% Cash Margin objective. Operational highlights for fiscal 2008 include: • Grew Sales Contracts 53% (70% in U.S. dollars) to $72.5 million. • Closed two of the largest single orders in Company history, one for US$1.7 million in our first quarter, and one for US$2.1 million in our fourth quarter, both to customers in the U.S. government market. • Reported record Sales Contract performance in Q1-F2008 of $21.0 million, and then ended the year with another record quarter in Q4-F2008 at $21.5 million. • Ended the fiscal year with a subscriber base of 3.3 million customer computers, up 110% from 1.6 million at June 30, 2007. • Generated cash from operations of $30.0 million, up 78% over last year, and increased cash margins from 36% to 41%. • Reduced the operating loss, excluding Investment Tax Credits and stock-based compensation, by 41% to $3.2 million. • Grew deferred revenue to $87.8 million, up 62% from last year. • Ended the quarter with cash, cash equivalents and liquid investments of $64 million, up 83% from June 30, 2007. • Achieved a milestone of 7,000 computer recoveries, and are now averaging approximately 1,000 recoveries per quarter. • Collaborated with Qualcomm to create real-time capability for Computrace solutions on Qualcomm’s wireless Gobi platform. • Signed a collaboration agreement with Intel to make Computrace solutions interoperable with Intel’s Anti-Theft Technology initiative. • Launched a new security service for Windows Mobile devices, opening up a completely new market opportunity for Absolute. • Launched a beta version of our real-time data delete, asset tracking and theft recovery services that enables customers to view all of their computing assets on a map. Customer Base The customer is the focal point of everything we do. Our objective is to deliver day-to-day management and emergency response services to customers of all sizes, and to do so with reliability and certainty. Th is is an essential part of building a successful SaaS business as recurring customer purchases are a critical element of the business model. We consider the level of existing customer purchases that recur each year to be a testament to the quality and importance of the services we provide. In fiscal 2008, $42.6 million, or 59% (2007: 52%), of our total Sales Contracts were to existing commercial customers (education, corporate, healthcare and government). These customers purchased 991,000 subscriptions, representing nearly 100% renewal and replacement rates on the 381,000 contracts that expired in the period, with the remainder representing deeper penetration into existing customers’ computer populations. This is a trend that has repeated itself each fiscal year, and one we expect to continue in fiscal 2009, during which approximately 500,000 commercial subscriptions will come up for renewal. 19
  • 22. Management’s Discussion & Analysis Traditionally, we have focused on customers in the commercial segment. However, in fiscal 2006, we launched a consumer offering branded “Computrace LoJack for Laptops”. The consumer market now represents 22% of our total Sales Contracts. Growth in this vertical accelerated at the end of fiscal 2007 due to a bundling program with a large PC OEM, which continued into fiscal 2008 and generated 14% of total Sales Contracts for the year. While the magnitude of this program declined in the second half of fiscal 2008, it gave us the momentum and scale we needed to establish a healthy and more diversified consumer business as we head into fiscal 2009. In addition to this ongoing program, for fiscal 2009, we have 550,000 consumer subscriptions coming up for renewal, which has created a new renewal revenue stream opportunity for us. Renewals to these customers is expected to be at a higher price than the high-volume bundling prices initially provided to our PC OEM partner. We have also expanded our consumer retail presence with Apple Stores, Costco.com, CircuitCity. com, Best Buy Canada, Future Shop, and will work to have others come on board for the coming back-to-school and Christmas season. Technology There are three main components of Absolute’s SaaS technology – the Network Operating Center (NOC), the Computrace Agent, and client applications. The NOC is hosted by Absolute in one of three North American locations. It accepts encrypted communications from activated Computrace Agents, provides instructions, scripts and client applications to the client and manages the services. Customers are able to access their management console via a secure web portal in order to manage, monitor and track their computing devices. The Computrace Agent is a stealthy and persistent software communication technology that occupies little space and operates in the background without end-user interruption. The Agent is only 27kb in size and is installed on the device hard drive once a customer activates the service. The Agent is also cross-platform and is capable of being deployed on, and integrated into, the firmware of any computing device. Some of the world’s leading PC OEMs provide embedded firmware support for the Computrace Agent that increases the Agent’s persistence, or ability to survive unauthorized attempts to tamper with the Agent. Embedded firmware support for Absolute’s Computrace Agent is built into the BIOS of laptops shipped worldwide by Dell, HP, Lenovo, Gateway (recently acquired by Acer, with its commercial businesses sold to MPC), Toshiba, Fujitsu, Panasonic, Motion Computing and Itronix. In addition, embedded BIOS support for Computrace is also provided with certain desktop lines from Dell, HP, Lenovo and Gateway. Embedded support was first provided by Lenovo in February 2005, and, by June 30, 2008, an estimated 80 million computers have shipped worldwide with embedded support for Computrace. Client applications include software developed by Absolute and other third-party software. The applications are able to be deployed remotely via the NOC and Computrace Agent communication protocol. The required applications are delivered only when needed. For example, Absolute’s forensic investigative tools are only deployed once a computer is reported stolen and the tools are only accessible by Absolute’s Investigative Recovery Team. In this manner, we keep these powerful tools in the hands of experts and protect our customers’ privacy during normal usage, and we also minimize the disc space used by our solutions. The client applications include a variety of powerful tools, including asset tracking and policy management applications, our data delete capability, and our forensic investigative tools (keystroke loggers, IP address trackers, Wi-Fi and GPS locators, remote access technology, etc.). Some of our new technology highlights for fiscal 2008 include: • Development of a post-theft audit tool that provides confirmation to our customers that their sensitive data was deleted and that it was not accessed prior to deletion. This is an essential compliance tool for organizations exposed to potential data breaches through lost or stolen computers. • Launch of our Windows Mobile handset solutions that enable our commercial customers to track smartphones and delete compromised data post loss or theft via the same customer console with which they secure and track their computers. This has created a new market opportunity for us and is expected to be followed with support for more services and devices in fiscal 2009. • Collaborative integration and support for Intel’s Anti-Theft Technology platform in April 2008. We expect this Intel initiative to significantly increase the market opportunity for anti-theft solutions through their marketing and worldwide awareness campaigns. As one of only six vendors authorized to leverage the Intel chip, and as the pioneer and leader in this emerging category, we expect to win 20
  • 23. Absolute Software 2008 Annual Report a significant share of this market, and to leverage it to accelerate our globalization initiatives. The new Intel chipsets with the Anti-Theft Technology platform are expected to begin shipping in the third quarter of calendar 2008. • Announced support for the Qualcomm Gobi module – the world’s only multimode 3G and GPS embedded chipsets that are expected to become available in the third quarter of calendar 2008. We expect this to accelerate the adoption of embedded broadband cellular capability. For customers who adopt this new technology, they can automatically utilize Absolute’s enhanced real-time data delete, asset tracking and theft recovery services, together with GPS tracking and mapping. With this capability, customers can see all of their computing assets on a map in real-time, providing powerful geo-fencing capability and immediate emergency response capability. We launched a beta version of this solution for customers to evaluate in July 2008. Sales and Distribution Channels Absolute has a relatively large sales and marketing organization that focuses on: generating end user customer demand, closing business, fulfilling the sale through our PC OEM partner, and continuing to serve the end customer. Over 80% of our sales are distributed through the PC OEMs that provide embedded BIOS support (Dell, HP, Lenovo, MPC (continuing Gateway’s former corporate business), Toshiba, Fujitsu, Panasonic, Motion Computing and Itronix), as well as others who do not (such as Apple, Acer and Sony). We continue to focus on collaboration efforts with our PC OEM partners as we can better support our mutual customers by working together. However, in efforts to maximize adoption, we have begun to expand our distribution channels to include other retailers, value-added resellers, system integrators and other industry-leading technology manufactures for computer and hand-held devices. We support our partner channels and customer demand via a team of sales and marketing profes- sionals who work alongside our partners to sell our solutions. We have found this to be highly effective and an essential component of our success. Patent Portfolio In addition to our customer base, embedded support and partner ecosystem, we also rely on a portfolio of 14 patents to maintain our competitive advantage. We continue to build this portfolio and currently have 16 new patent applications in process. In order to protect our intellectual property and support our competitive position, we began licensing and litigating to protect our patent portfolio in calendar 2005. Several competitors have since taken licenses to our patent portfolio, and are paying royalty-type fees to Absolute for this right, which to date have not been significant, while others have opted to exit the business. In defending its patent portfolio, Absolute has been the initiating party with respect to assertions and claims of patent infringement. In one case initiated by Absolute, Absolute Software, Inc. v. Stealth Signal, Inc. (USDC Southern District of Texas – Case No. H-05-1416), as a result of a counterclaim in that suit, Absolute is also defendant to a patent infringement claim. Stealth Signal, Inc. (“Stealth”), in an attempt to defend against Absolute’s action, obtained a license to a third-party patent and has asserted a counterclaim alleging that Absolute is infringing this third-party patent. Management and its expert advisors believe strongly that the counterclaim is without merit and, accordingly, no provision or contingency has been recorded in the financial statements. The parties had claim construction hearings in early June 2007, and supplementary briefings have also been fi led. The parties continue to await the Court’s ruling regarding claim construction of the asserted patents. According to SEC documents fi led in August 2007, Phoenix Technologies Inc. (“Phoenix”) purchased certain intellectual property assets relating to the laptop computer software security products of Stealth. At this time it is uncertain whether, when or how this development may impact Absolute’s case against Stealth. We do not regard the second patent dispute as material, and the defendant in that case has not asserted any affirmative counterclaims against Absolute. While we firmly believe that Absolute will ultimately prevail in these two cases, the outcome, time to resolution and impact on Absolute’s business and patent portfolio, if any, cannot be determined at this time. The actual resolution of any matter before the courts, whether at a final or interlocutory stage, may differ materially as a result of future rulings issued by such courts; therefore, as additional information becomes available, management continually re-assesses the potential liability relating to pending litigation, if any. Refer to the “Risks and Uncertainties” section of this MD&A for further information. 21
  • 24. Management’s Discussion & Analysis Software-as-a-Service Business Model Absolute sells solutions in a SaaS model in which customers acquire subscriptions to software-based services for a limited license term. From a financial perspective, the SaaS model improves the visibility of revenue streams, increases recurring cash flows and is expected to maximize profitability over time. However, the accounting treatment for the SaaS model results in a significant deferral of revenue and profitability generated from pre-paid subscriptions, despite the cash flow it generates in the current reporting period. As a result, SaaS companies are generally evaluated based on Sales Contracts (or prepaid bookings) and free cash flow as opposed to revenue and net earnings. Accordingly, we believe that an understanding of this distinction is important to an evaluation of Absolute’s performance. Subscriptions to Absolute’s solutions are fully invoiced up-front for the purchase term (which varies from one to five years) with non-refundable payment received on standard invoice terms. However, as the customer pays the same amount on renewal of the contract, or on purchase of a new subscription, the full value invoiced is deferred on the balance sheet and recognized ratably over the contract term. We refer to these subscriptions as “Sales Contracts”, which, as previously mentioned, are not a standardized measure prescribed under Canadian GAAP. Sales Contracts are a component of deferred revenue and are calculated by adding revenue to the change in deferred revenue (see Note 10 of the Notes to the Consolidated Financial Statements). As our Sales Contracts have traditionally averaged around 30 months in term, there is a significant lag between revenue recognition and the timing of the Sales Contract and non-refundable cash flows. In general, only 15-20% of Sales Contracts in any given fiscal year are also recognized as revenue in the same fiscal year. Conversely, a majority of our operating expenses in each fiscal year are incurred to generate these Sales Contracts for the period. As a result, in times of rapid growth in the business, GAAP earnings will often decrease or losses increase, while operating cash flow accelerates. Should Sales Contract growth slow down, it is expected that the GAAP earnings would eventually increase to the point where it aligns with cash flow. As more than 50% of annual Sales Contracts tend to come from existing customer renewals and add-ons, we consider expenses incurred to support existing customers to be marketing-related expenses to generate renewals and add-ons, as opposed to pure support costs for prior service commitments. As a result, we focus on Sales Contracts and Cash from Operations as the key performance metrics for the Company. We believe these metrics provide the most meaningful evaluation of the business, while revenue and operating income, or loss, provide a lagging indication of performance. FINANCIAL PERFORMANCE REVIEW AND ANALYSIS Sales Contracts and Revenue Fiscal 2008 Sales Contracts increased 53% (70% in U.S. dollars) to $72.5 million, compared to $47.3 million last year, and increased 222% (267% in U.S. dollars) compared to $22.5 million in fiscal 2006. The increase reflects Absolute’s investment in its team, consumer bundling programs, commercial market sales strategies (corporate, education and government), and international expansion. At the same time, awareness of security issues surrounding mobile computing continues to create growing demand for Absolute’s solutions. The 53% growth in fiscal 2008 Sales Contracts is lower than the 110% growth in fiscal 2007 and 70% in fiscal 2006, due to the decline in the value of the U.S. dollar over the past two years, and the initial sales acceleration from the consumer and embedded strategies introduced in fiscal 2006. Fiscal 2008 Fiscal 2007 Fiscal 2006 Total subscription sales in units 2,248,922 1,077,227 403,489 Percent of subscription sales ($): Institutional customers 78% 80% 87% Consumer customers 22% 20% 13% Average selling price (USD) US$31.80 US$39.02 US$48.36 Average contract term 30 months 30 months 32 months 22
  • 25. Absolute Software 2008 Annual Report The average selling price (“ASP”) per subscription has decreased from prior years reflecting a changing product mix. The ASP reduction is primarily due to a higher proportion of sales from consumer bundle programs that were introduced in the last half of fiscal 2007, and an increase in data delete and asset tracking solutions, all of which are lower priced and lower featured solutions. Conversely, the ASP for commercial and consumer theft recovery offerings has remained stable in U.S. dollar terms. Sales Contracts are recorded at the value received by Absolute from either the reseller or directly from the customer. The value received from the reseller is net of reseller discounts. Accordingly, the retail price paid for Absolute’s solutions is higher than the amount reported by Absolute as Sales Contracts. Revenue for fiscal 2008 increased 88% to $37.9 million, compared to $20.1 million last year, and increased 224% compared to $11.7 million in fiscal 2006. Revenue is derived almost entirely from the amortization of Sales Contracts through deferred revenue. Since the average contract life is approximately 30 months, a majority of revenue is from Sales Contracts completed during the prior three years. In general, only 15-20% of new and renewal Sales Contracts in any given fiscal year are included in revenue for the year, with the remainder included in deferred revenue on the balance sheet. See the SaaS Model section of this MD&A for further discussion. Operating Expenses (dollar and subscription figures in millions) Fiscal 2008 Fiscal 2007 Fiscal 2006 Cost of goods sold (“COS”) $ 11.4 $ 6.9 $ 4.1 Sales and marketing (“S&M”) 18.1 10.1 6.7 Research and development (“R&D”) 4.8 3.3 2.0 General and administration (“G&A”) 6.7 5.2 3.2 Total operating expenses, excluding Investment Tax Credits and stock-based compensation* $ 41.0 $ 25.5 $ 16.0 % increase 61% 59% 46% % of Sales Contracts 57% 54% 71% Number of employees at quarter-end 248 168 106 Subscriptions under contract 3.3 1.6 0.7 * Stock-based compensation is excluded as it is a non-cash item which has increased primarily due to changes in the Company’s stock price and growth in headcount. Investment tax credits are excluded as fi scal 2008 was the fi rst year of recording these and was a cumulative adjustment, so it is not indicative of the expected annual amount in the future, nor is it meaningful to evaluate relative to prior periods. Total operating expenses, excluding Investment Tax Credits and stock-based compensation, have increased commensurate with sales growth over the past three fiscal years. The 61% increase over last year is a result of expansion of the employee base and sales and marketing efforts to generate and support current and future sales growth targets. A majority of operating costs relate to current Sales Contracts and, therefore, management focuses on total expenses excluding stock-based compensation as a percentage of Sales Contracts to measure the efficiency and effectiveness of this investment. For fiscal 2008, this ratio increased to 57% of Sales Contracts from 54% last year, and improved from 71% in fiscal 2006. The ratio is in line with management expectations and cash margin targets for the respective periods. The gross margin for fiscal 2008 has improved to 70% compared to 66% in the prior year and 65% in fiscal 2006. When considering the gross margin, it is important to recognize that approximately 30% of the cost of goods sold (“COS”) in the period is made up of up-front costs related to the Sales Contracts generated in the period as opposed to revenue. These COS items include packaging costs and initial training, delivery and customer support costs associated with new customer subscriptions. The remaining costs relate to monitoring, recovery and guarantee costs, which management also views as relating to current sales rather than revenue, given that over 50% of Sales Contracts are generated through existing customers. Increases in sales and marketing (“S&M”) expenditure reflect expansion of the sales team and increased marketing expenditures to support partner and vertical growth strategies. As a percent of Sales Contracts, S&M expenses were 25% for the current year, compared to 21% in fiscal 2007 and 30% in fiscal 2006. The increase relative to fiscal 2007 is primarily due to marketing programs implemented to accelerate attach rates and support international growth, and the expansion of Absolute’s business development team to capitalize on partnering opportunities such as those with Intel and Qualcomm. 23
  • 26. Management’s Discussion & Analysis Research and development (“R&D”) expenditures increased 47% in fiscal 2008 in support of current and future sales targets, partner integration initiatives, new feature development (such as the recent real-time and smartphone launches), and international expansion. Resources continue to be added in support of the Company’s strategic objectives. General and administrative (“G&A”) expenses increased 29% over last year primarily due to increases in rent and compensation expenses. Rent has increased as the Company moved its head office in August 2007, and acquired additional space in June 2008, which increased both its square footage and lease rate. The compensation expense has increased with sales, reflecting rising headcount and compensation levels. The increase in these expenditures was partially offset by a reduction in litigation expenses which declined to $265,000 in fiscal 2008, from $1.1 million in fiscal 2007 and $492,000 in fiscal 2006. Operating Loss Absolute’s operating loss, excluding Investment Tax Credits and stock-based compensation, was $3.2 million for fiscal 2008, a 41% decrease from $5.3 million last year, and a 26% decrease from $4.3 million in fiscal 2006. The growth in Sales Contracts over the last three years has resulted in revenue reaching sufficient levels to offset the operating cost increases required to meet Absolute’s sales growth targets. Stock-based compensation increased to $4.9 million in fiscal 2008, compared to $1.0 million last year, and $476,000 in fiscal 2006. The increase reflects the Company’s significant headcount expansion to 248 people (168 June 30, 2007; 106 June 30, 2006), and share price appreciation resulting in a higher Black-Scholes value for calculating stock-based compensation expense. As a result, the GAAP operating loss excluding Investment Tax Credits increased to $8.1 million for this year, compared to $6.3 million in the prior year and $4.8 million in fiscal 2006. Other Income (Expense) Absolute earns interest income on its cash resources beyond immediate operating requirements. These cash balances are invested in money market funds, bankers’ acceptances and investment grade bonds and com- mercial paper. During fiscal 2008, investment management of Absolute’s cash resources was outsourced to institutional money managers. For fiscal 2008, interest income increased to $2.1 million from $1.0 million in fiscal 2007 and $388,000 in fiscal 2006. Other expenses include $1.4 million of writedowns relating to long-term investments recorded at $3.2 million on the balance sheet. These investments, which include asset-backed commercial paper and other investments, have been written down to their estimated market value at June 30, 2008. Other expenses include foreign exchange gains and losses primarily on the translation of U.S. dollar cash, receivable and liability balances. U.S. denominated assets normally exceed liabilities as over 90% of sales are denominated in U.S. dollars, compared to approximately 50% of costs. Th is generally results in foreign exchange losses (gains) in periods where the U.S. dollar declines (appreciates) relative to the Canadian dollar. In fiscal 2008, the foreign exchange loss was $805,000 as compared to a $640,000 loss in fiscal 2007, and a $229,000 loss in fiscal 2006, as a result of the significant decline in the U.S. dollar during the past two years. While changes in U.S. dollar depreciation relative to the Canadian dollar has impacted the rate of Sales Contract growth, Absolute has been able to manage investment levels to achieve its Cash Margin targets. Net Loss The Company’s net loss after income taxes for fiscal 2008 was $8.4 million, a 43% increase from $5.9 million last year, and an increase of 113% from $3.9 million in fiscal 2006. The increased loss in fiscal 2008 is primarily due to writedowns of certain investments and increased stock-based compensation expense. Excluding these items, the fiscal 2008 net loss decreased 58% to $2.1 million, compared to $4.9 million for the same period last year, and decreased 40% from $3.5 million in fiscal 2006. Included in the fiscal 2008 net loss was an income tax expense for Canadian taxes of $1.4 million. This was offset by a $1.4 million tax recovery for the value of Canadian Investment Tax Credits (“ITCs”). These ITCs were credited against operating expenses, as the credit is generated by certain eligible research and development expenditures. Further ITCs are expected in future periods, but at a lower value as the fiscal 2008 amount includes a cumulative credit from prior years. In prior periods, management deemed it less likely that these credits would be realized. 24
  • 27. Absolute Software 2008 Annual Report Cash from Operations Including the quarter just ended, Absolute has generated 16 consecutive quarters of positive cash from operations. Cash from operations for fiscal 2008 of $30.0 million increased 78% from $16.9 million last year and 615% from $4.2 million in fiscal 2006. The increase is a result of accelerated Sales Contract growth and increased leverage in the business. Consistent with historic patterns, first and second quarter cash from operations are higher due to seasonally strong sales, and then trend downward in the second half of the fiscal year as investments for the coming fiscal year are made. The resulting “Cash Margin” (equal to cash from operations as a percent of Sales Contracts) increased to 41% for fiscal 2008 as compared to 36% in fiscal 2007 and 19% in fiscal 2006. Liquidity and Capital Resources Absolute is in a strong financial position, with no debt and with the financial resources necessary to fund its operating and capital requirements and to execute on its growth strategies. At June 30, 2008, Absolute’s cash, cash equivalents and investments increased on positive operating cash flows to $64.0 million, compared to $34.9 million at June 30, 2007, and $16.7 million at June 30, 2006. Management expects the Company to continue generating cash from operations in the coming quarters and, therefore, believes that the Company has sufficient capital resources to meet its growth and operating requirements. The Company has no material capital expenditure commitments for fiscal 2009. Given its cash and short-term investment balances and operating cash flow, at this time the Company does not have, nor require, any additional capital resources. Accounts Receivable Accounts receivable balances increased to $18.4 million at June 30, 2008 (86% of fourth quarter Sales Contracts), up from $11.7 million at June 30, 2007 (72% of fourth quarter Sales Contracts), and $6.2 million at June 30, 2006 (74% of fourth quarter Sales Contracts). Quarterly Sales Contracts tend to be concentrated toward the end of the quarter; therefore, a high proportion of current quarter sales tend to remain in receivables at the end of each quarter. At June 30, 2008, this ratio increased to 86% due to an unusually large proportion of fourth quarter sales generated in the last month of the quarter (57% of Q4 sales were in the month of June 2008, while last year only 46% of Q4 sales were in the month of June 2007), changes in payment terms for the consumer bundle program, and payment delays resulting from an OEM partner being acquired. The accounts receivable balances are net of bad debt allowances of $715,000 at June 30, 2008, compared to $20,000 at June 30, 2007. As a majority of the related revenue is included in deferred revenue, a majority of the bad debt allowances is charged to deferred revenue and amortized against revenue over the term of the sales to which the allowance relates. Deferred Contract Costs Certain direct contract costs are capitalized as deferred contract costs on the balance sheet and are charged to income over the term of the contract to which they relate. Capitalized direct contract costs are primarily comprised of prepaid employee commissions and estimated warranty costs over the life of each contract. At June 30, 2008, deferred contract costs of $14.7 million (17% of deferred revenue) are up from $11.2 million (21% of deferred revenue) at June 30, 2007 and $5.8 million (22% of deferred revenue) at June 30, 2006. The decrease to 17% of deferred revenue at June 30, 2008 reflects a reduction in the overall sales commission and warranty accrual rates. Accrued Warranty Absolute offers a recovery guarantee, or warranty, with certain of its products whereby customers are eligible for up to a US$1,000 guarantee payout if they follow the proper terms and conditions, and Absolute is unable to recover the stolen computer within a specified time frame. For each Sales Contract that includes the guarantee, Absolute records a warranty provision for the full value of estimated guarantee payments under the program. The corresponding expense is recorded as deferred contract costs and charged to cost of sales over the term of each contract. Net guarantee payments made to subscribers reduce the warranty accrual. 25
  • 28. Management’s Discussion & Analysis Accrued warranty increased to $11.8 million (13% of deferred revenue) at June 30, 2008, compared to $8.0 million (15% of deferred revenue) at June 30, 2007, and $2.9 million (11% of deferred revenue) at June 30, 2006. Each period, management evaluates its guarantee payment experience and considers whether changes are required to the estimated warranty provision. Based on this evaluation of actual warranty experience, management decreased the accrual rate in fiscal 2008 to an average of $3.36 per unit per year from $3.75 per unit per year in fiscal 2007. Deferred Revenue Deferred revenue represents Sales Contracts invoiced for which the non-refundable payment is received or due to be paid in full, but for which the revenue is not yet recognizable under GAAP. Refer to Note 10 for a reconciliation of deferred revenue to Sales Contracts and revenue. As a result of Sales Contracts of $72.5 million in fiscal 2008, deferred revenue climbed to $87.8 million at June 30, 2008, compared to $54.2 million at June 30, 2007, and $27.0 million at June 30, 2006. Future Sales Contracts will continue to increase this balance and will have a corresponding effect on revenue in future periods. Deferred revenue provides a high degree of visibility for future period revenues, with the current portion showing the amount that will be included in revenue over the next 12 months. The scheduled recognition of deferred revenue is as follows: F2009 F2010 F2011 F2012 F2013 Total Revenue recognized (millions) $ 41.4 $ 27.7 $ 14.0 $ 3.8 $ 0.9 $ 87.8 Subscriptions expiring (millions of units) 1.0 0.6 1.2 0.5 – 3.3 Accounting Changes Refer to Note 2(b) in the June 30, 2008 Consolidated Financial Statements Quarterly Operating Data (in millions except per share data) Q4-08 Q3-08 Q2-08 Q1-08 Q4-07 Q3-07 Q2-07 Q1-07 Q4-06 Sales Contracts $ 21.5 $ 15.0 $ 15.0 $ 21.0 $ 16.2 $ 10.6 $ 9.3 $ 11.1 $ 8.4 Revenue 11.2 10.1 8.9 7.7 6.3 5.3 4.6 4.0 3.4 Net loss (ex-Stock- Based Comp) (0.7) 0.1 (0.8) (2.0) (2.0) (0.9) (0.8) (1.2) (1.1) Net (Loss) (2.3) (1.3) (1.9) (2.9) (2.4) (1.2) (1.0) (1.3) (1.3) Basic and diluted (loss) per share (0.05) (0.03) (0.04) (0.06) (0.05) (0.03) (0.02) (0.03) (0.03) Cash from operations 5.4 6.6 9.1 8.9 4.5 3.5 4.3 4.7 1.3 Operating cash per share (basic) 0.11 0.14 0.19 0.19 0.10 0.08 0.10 0.11 0.03 Shareholders’ Deficiency and Outstanding Share Data At June 30, 2008, Absolute had shareholders’ deficiency of $2.9 million. In evaluating the shareholders’ equity, management believes it is important to consider the $87.8 million of deferred revenue carried on the balance sheet. This represents prepaid (or due to be paid on standard payment terms) and non-refundable revenue, which management expects to generate high margins when recognized in income as much of the associated contract costs are already included in the operating deficit. Effective January 4, 2008, Absolute’s common shares were subdivided on a two-for-one basis. All per share amounts in this discussion and analysis have been restated to reflect the split. The Company’s common shares trade on the TSX (TSX:ABT), and at June 30, 2008 the Company had 47,811,570 (47,858,532 at August 11, 2008) fully issued and outstanding common shares. At an Extraordinary General Meeting of the Company held on June 8, 2007, shareholders approved an amendment to the Company’s Employee Share Option Plan which resulted in an increase in the number of options available for grant under the Plan to 6,916,346. In addition, shareholders approved a two-year rolling option plan whereby the number of options is increased to 15% of outstanding common shares. 26
  • 29. Absolute Software 2008 Annual Report The following common share stock options and warrants are issued and outstanding at June 30, 2008: • Employee Share Option Plan (2007): 6,169,410 common stock options granted and outstanding. The options have a weighted average strike price of $8.92 per share, and a weighted average term to expiry of 3.1 years. In fiscal 2008, a total of 2,658,950 stock options were granted to employees at an average strike price of $14.28, of which 721,000 were issued to insiders at an average strike price of $14.73. Of the total grants issued in fiscal 2008, 1,448,000 were issued as new hire grants. • Employee Share Purchase Plan (2006): Under the Plan, employees may purchase treasury shares at a 15% discount from the market price during a six-month offering period. A total of two million shares have been reserved for grant under the Plan, of which 306,984 have been issued as at June 30, 2008, with an additional 46,962 issued on July 4, 2008. • Branding Agreement Warrants: The Company issued one million warrants in fiscal 2006 to acquire rights to the “LoJack” brand name, of which 600,000 remained outstanding at June 30, 2008 and August 11, 2008. The warrants have an exercise price of $1.00 per share, vest 20% per year starting June 30, 2006, and expire the earlier of two years after vesting, June 30, 2010, or upon termination of the agreement. Critical Accounting Policies and Estimates Management considers the Company’s accounting for Sales Contracts, deferred contract costs, warranty accruals and future tax assets to be critical accounting policies. An understanding of the accounting policies for these items is important for meaningful analysis of Absolute’s business. Sales Contracts and deferred contract costs represent invoiced sales and expenses that are generated or incurred at the start of each service subscription. These items are capitalized on the balance sheet as deferred revenue or deferred contract costs, and are recognized as revenue or expense ratably over the contract term. No management estimates are required for deferred revenue as the amortization period is based upon the purchased term of service in each contract. Deferred costs are amortized on the same basis as the contracts to which they relate, which management estimates to match the benefit period. If manage- ment’s estimate of the future value of such costs should change it could result in a significant writedown in the value of this deferral. Warranty accruals require management estimates of the amount of warranty claims that will be paid over the life of each sales contract. The value of the accrued warranty estimate is capitalized with deferred contract costs and charged to cost of sales ratably over the contract term. Accrual estimates are established based on Absolute’s experience with loss and recovery rates, and are reviewed for reasonableness based on actual experience on a regular basis. However, actual experience will likely vary and may require a change in the estimated liability. Should these estimates change, they may require changes to the amount of warranty expense in future periods, in addition to a change in the warranty accrual. The Company has recognized a portion of its future tax assets on the balance sheet. Each reporting period, management assesses the likelihood of realizing future tax assets. Where management considers that it is more likely than not that some portion or all of the future tax assets will be realized, the estimated realizable value of the future tax asset is recognized on the balance sheet. The net income or loss after income taxes can vary widely in periods where tax assets are recognized, and such variances could lead to a material writedown or increase in the estimated value of the Company’s tax assets. Contractual Commitments The Company does not have minimum purchase commitments or significant contractual commitments beyond its leased premises, LoJack branding agreement and fulfillment of services under its Sales Contracts. The following table summarizes these commitments: F2009 F2010 F2011 F2012 F2013 F2014+ Total Lease Commitments $ 1,170,265 $ 1,305,518 $ 1,260,186 $ 1,280,082 $ 1,279,826 $ 540,567 $ 6,836,444 LoJack Agreement 101,970 101,970 101,970 101,970 101,970 203,940 713,790 Total Commitments $ 1,272,235 $ 1,407,488 $ 1,362,156 $ 1,382,052 $ 1,381,796 $ 744,507 $ 7,550,234 27
  • 30. Management’s Discussion & Analysis Off-Balance Sheet Arrangements The Company has not entered into any off-balance sheet arrangements. Related Party Transactions The Company does not enter into related party transactions. Subsequent Events Up to the date of this report of August 11, 2008, there have not been any significant subsequent events or transactions that would require disclosure in, or adjustment to, the consolidated financial statements as at June 30, 2008. Recent Canadian Accounting Pronouncements Goodwill and Intangible Assets In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062. This new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets and is effective for the Company beginning July 1, 2009. Adoption of International Financial Reporting Standards (IFRS) The CICA plans to converge Canadian GAAP with IFRS over a transition period expected to end in 2011. The Company is currently assessing the future impact of these new standards on its financial statements. Evaluation of Disclosure Controls and Internal Controls over Financial Reporting The Company has disclosure controls and procedures in place that are designed to provide reasonable assurance that material information relating to Absolute is disclosed on a timely basis. Management has reviewed the Company’s disclosure controls and concluded that they were effective during the reporting period. The Company has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP. During fiscal 2008, there were no changes to internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting. Risks and Uncertainties The Company is selling and developing products and services for new and emerging markets and, as a result, faces a number of risks, many of which are outlined below. Microsoft Operating Systems Absolute has designed the majority of its services to operate on certain generations of Microsoft Windows operating systems. The development by Microsoft of new versions of Windows and/or upgrades or updates to Windows or other operating systems and/or the market adoption of these or other operating systems developed by other vendors may have an adverse effect on Absolute’s business if we are not able to adapt our technology to be compatible with these new operating systems. Dependence on Distribution Channels Absolute generates a substantial portion of its revenue through PC OEM channels and its sales strategy is built upon Absolute’s ability to continue to maintain its BIOS position with these partners and grow its reseller channels. If unable to access end customers through its reseller channels, Absolute will have to change its sales strategy and may not be able to grow at the rates anticipated. Operating Environment The Computrace software that enables this product operates in a potentially hostile environment. In addition, Absolute’s services rely upon connection to Absolute’s monitoring centre. If the computer is prevented from making, or is not able to make, a connection, Absolute will not have an opportunity to assist in recovering the stolen computer. If Absolute is unable to successfully demonstrate to customers that the Computrace Agent will call in, it may affect Absolute’s ability to sell the theft recovery portion of the products offered to customers. 28
  • 31. Absolute Software 2008 Annual Report Product Errors and Third-Party Mischief The software technology that enables Absolute’s software services is complex and the related application software may contain errors or defects, especially when first introduced or when new versions are released. Any errors that are discovered after commercial release could result in loss of revenues or delay in market acceptance, diversion of development resources, damage to Absolute’s reputation, increased service and warranty costs and liability claims. In addition, it is possible that our product may become the subject of a third-party attack or disruption, whether malicious or otherwise. This could adversely affect the persistence of our technology and a materially adverse effect of this kind could materially adversely affect our business. Breach of Security Measures and Unauthorized Access The Company’s service involves the storage and transmission of certain customer information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. Absolute’s technology and security measures have been designed and implemented in order to mitigate risks of this nature. However, if our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, during transfer of data to additional data centres or at any time, and, as a result, someone obtains unauthorized access to our data or our customers’ data, our reputation could be damaged, our business may suffer and Absolute could incur significant liability. The Company may be unable to anticipate new attack techniques or may not have time to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and Absolute could lose sales and customers. In addition, our customers may authorize third-party service providers to access their customer data. Because the control of these third-party service providers is undertaken by our customers, Absolute cannot ensure the complete integrity or security of such transmissions or processing. Interruptions or Delays in Service from Our Third-Party Hosting Facilities Absolute currently serves its customers from facilities that include a third-party hosting facilities located on the west coast of Canada and the U.S. Damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable. As part of our current disaster recovery arrangements, redundant hardware is deployed where possible in all production customer environments. Production data is backed up onto encrypted media and taken off-site. The recovery procedures and encryption keys are held remotely by Absolute employees, so that the systems can be restored in the event of a site-wide disaster. Other than contractual assurances and agreed-to controls, Absolute does not control the operation of any of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted. Consumer Product Liability With the expansion of its consumer business, as with all manufacturers of products and services designed for use by consumers, the Company may be subject to claims related to product liability and consumer protection legislation, particularly in the U.S. Although the Company is insured for claims relating to product liability, no assurance can be given that a judgment will not be rendered against it in an amount exceeding the amount of insurance coverage or in respect of a claim for which the Company is not insured. Competition It is also possible that new competitors will enter the marketplace. Several potential competitors are marketing or have announced the development of computer products in direct competition with Absolute. In addition, as Absolute develops new services, the Company may begin competing against companies with whom it did not previously compete. Such competitors may be able to develop and expand their services more quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the marketing and sale of their services and products than Absolute. Accordingly, the entry of new competitors could have a material adverse effect on Absolute’s business, financial condition and results of operations. 29
  • 32. Management’s Discussion & Analysis Ability to Predict Rate of Growth and Profitability Absolute focuses on sales growth and cash from operations as its key performance metrics, and management believes that revenue and GAAP profitability will approach the Company’s Cash Margins as the rate of growth slows down. However, due to the evolving SaaS business model and the unpredictability of our emerging security category, Absolute may not be able to accurately forecast the rate of adoption of its services and hence its sales growth. Absolute bases its current and future expense levels and its investment plans on estimates of future sales growth. Absolute may not be able to adjust its spending quickly enough if the rate of new or renewed subscriptions falls short of its expectations. As a result, Absolute’s operating results may fluctuate significantly on a quarterly basis. In addition, Absolute’s recent Sales Contract, revenue and cash flow growth rates may not be sustainable and may decline in the future. Accordingly, period-to-period comparisons of our operating results may not necessarily be a meaningful indicator of future performance. Customer Subscription Renewal Rates Absolute generates more than 50% of its annual sales from continued purchases and subscription renewals to existing customers. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their level of satisfaction with the services and their ability to continue their operations and spending levels. If our customers do not renew their service subscriptions, our revenue will decline and our business will suffer. Additional Patent Applications The Company’s commercial success depends upon its ability to develop new or improved technologies and products, and to successfully obtain patent or other proprietary or statutory protection for these technologies and products in Canada, the United States and other countries. The Company seeks to patent concepts, components, protocols and other inventions that are considered to have commercial value or that will likely yield a technological advantage. The Company owns rights to patented and patent pending technologies in the United States, Canada and other countries. However, the Company may not be able to develop new technology that is patentable, new patents may not be issued in connection with the Company’s pending applications and allowed claims may not be sufficient to protect the Company’s new technology. Furthermore, any patents issued could be challenged, invalidated or circumvented and may not provide proprietary protection or a competitive advantage. New entrants to the field may have been issued patents, and may have fi led patent applications or may obtain additional patents and proprietary rights, for technologies similar to those that the Company has made or may make in the future. Since patent applications fi led before November 29, 2000 in the United States are maintained in secrecy until issued as patents, and since publication or public awareness of new technologies often lags behind actual discoveries, the Company cannot be absolutely certain that it was the first to develop the technology covered by its pending patent applications or that it was the first to fi le patent applications for the technology. In addition, the disclosure in the Company’s new patent applications, particularly in respect of the utility of its claimed inventions, may not be sufficient to meet the statutory requirements for patentability in all cases. As a result, there can be no assurance that the Company’s new patent applications will result in enforceable patents, nor can the breadth of allowed claims in the Company’s patents, and their enforceability, be predicted. Even if the Company’s patents are held to be enforceable, others may be able to design around these patents or develop products similar to the Company’s products that are not within the scope of these patents. Other Proprietary Rights In addition to patents, the Company relies on, among other things, copyrights, trademarks, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. While the Company enters into confidentiality and non-disclosure agreements with its employees, consultants, business partners, customers, potential customers and other third parties having access to proprietary and confidential information, it is possible that: some or all of its confidentiality agreements will not be honored; third parties will independently develop equivalent technology or misappropriate the Company’s technology and/or designs; disputes will arise with the Company’s strategic partners, customers or others concerning the ownership of intellectual property; unauthorized disclosure of source code; unauthorized disclosure of the Company’s know-how or trade secrets will occur; or contractual provisions may not be enforced in foreign jurisdictions. There can be no assurance that the Company will be successful in protecting its proprietary rights. 30
  • 33. Absolute Software 2008 Annual Report Development of Brand Absolute believes that developing and maintaining awareness of its proprietary and licensed brands in a cost-effective manner is critical to achieving widespread acceptance of its existing and future services and is an important element in attracting new customers. Furthermore, Absolute believes that the importance of brand recognition will increase if competition in our market develops or intensifies. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts and our ability to provide reliable, secure and useful services at competitive prices. If Absolute fails to successfully promote and maintain its brands, or incur substantial expenses in an unsuccessful attempt to promote and maintain its brands, Absolute may fail to attract enough new customers or retain existing customers to the extent necessary to realize a sufficient return on brand-building efforts. In addition, failing to maintain the Company’s license rights to the LoJack® brand, which Absolute licenses from a third party, could also harm our business. Intellectual Property Licensing and/or Enforcement Absolute’s revenue, cost of sales, and expenses may suffer if it cannot continue to license or enforce our intellectual property rights or if third parties assert that Absolute violates their intellectual property rights. The Company relies upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with employees, customers, suppliers and other parties, to establish and maintain intellectual property rights in its Computrace technology platform. However, the industry in which the Company competes may include new or existing entrants that own, or claim to own, intellectual property, and the Company has received, and may receive in the future, assertions and claims from third parties that the Company’s products infringe on their patents or other intellectual property rights. Litigation has been and will likely continue to be necessary to determine the scope, enforceability and validity of third-party proprietary rights or to establish the Company’s proprietary rights. Any of the Company’s direct or indirect intellectual property rights could be challenged, invalidated or circumvented, or such intellectual property rights may not be sufficient to permit Absolute to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly or delayed product redesign efforts, discontinuance of certain product offerings or other competitive harm. Furthermore, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States. Therefore, in certain jurisdictions, Absolute may be unable to protect its proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect its competitive position. Third parties also may claim that Absolute or customers or partners indemnified by Absolute are infringing upon their intellectual property rights. In recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from established companies. Even if management believes that the claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from the business. Claims of intellectual property infringement also might require Absolute to redesign affected products, enter into costly settlement or license agreements (if such licenses can be obtained on commercially reasonable terms, or at all) or pay costly damage awards, or face a temporary or permanent injunction prohibiting the marketing or selling certain of our products, which could result in the Company’s business, operating results and financial condition being materially adversely affected. Privacy Law Concerns Absolute’s customers use our service to transmit, receive and store identifying information regarding their mobile computing devices, including location information. Our products and monitoring systems are developed to ensure that components or tools that enable personal information to be obtained from host computers are not resident in the products during normal use, and are only implemented by Absolute’s trained experts in the case of emergency. While information obtained in normal usage is generally not of a personally identifiable nature, advances in location and tracking technology may evolve such that certain types of information collected in the tracking process could be considered to be personally identifiable information. Federal, provincial, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of personal information obtained from consumers and individuals. The costs of compliance with, and other burdens imposed by, such laws and regulations that are applicable to the businesses of our customers may limit the use and adoption of our service and reduce overall demand for it. Even the perception of privacy concerns, whether it is valid or not, may inhibit market adoption of our service in certain industries. 31
  • 34. Management’s Discussion & Analysis Emerging Markets and Technology The market for Absolute’s products is still emerging and continued growth and demand for, and acceptance of, these products remain uncertain. In addition, other emerging technology and markets may impact the viability of the market for Absolute’s products. Absolute’s continued success will depend upon its ability to keep pace with technological and marketplace change and to introduce, on a timely and cost-effective basis, new and enhanced products that satisfy changing customer requirements and achieve market acceptance. There can be no assurance that Absolute will be able to respond effectively to changes in technology or customer demands. Moreover, there can be no assurance that Absolute’s competitors will not develop competitive products, or that any such products will not have any adverse effects on Absolute’s business, financial condition or results of operations. Management of Growth In the past four fiscal years, Absolute has continued to experience rapid sales growth and has been focused on continuing this growth trend. This trend has resulted in increasing headcount and operational costs to generate and support this growing customer base, which has placed, and will continue to place, to the extent that Absolute is able to sustain such growth, a significant strain on management, administrative, operational and financial infrastructure. Absolute anticipates that further growth will be required to address increases in the customer base, further development of the service, as well as expansion into new geographic areas. Further growth will require Absolute to continue to hire, train and manage new employees as needed. If new hires perform poorly, or if Absolute is unsuccessful in hiring, training, managing and integrating these new employees, or if Absolute is not successful in retaining existing employees, our business may be harmed. Efforts to Sell to Larger Enterprise Customers As Absolute targets more sales efforts at larger enterprise customers, the Company could face greater costs, longer sales cycles, less predictability in completing some sales and greater fluctuation in sales and cash flow in quarters where these large deals conclude. In this market segment, the customer’s decision to use Absolute’s service may be an enterprise-wide decision and, if so, these types of sales may require Absolute to provide greater levels of education regarding the use and benefits of the service, as well as education regarding privacy and data protection laws and regulations to prospective customers with international operations. As a result of these factors, these sales opportunities may require Absolute to devote greater sales support and professional services resources to individual customers, driving up costs and time required to complete sales and diverting sales and professional services resources to a smaller number of larger transactions. Foreign Operations The Company intends to continue to pursue international market growth opportunities, which could result in a scenario where international sales account for an increasing portion of the Company’s consolidated revenues. The Company intends to commit increased resources to its international operations as well as to related sales and marketing activities. The Company maintains offices in Canada, the U.S. and the United Kingdom. The Company may not be aware of all the factors that may affect its business in foreign jurisdic- tions. The Company will be subject to a number of risks associated with international business activities that may increase liability or costs, lengthen sales cycles or require significant management attention. International operations carry certain risks and associated costs, such as: the complexities and expense of administering a business abroad; complications in compliance with, and unexpected changes in legal and regulatory restrictions or requirements; foreign laws, international import and export legislation; trading and investment policies; foreign currency fluctuations; exchange controls; tariff s and other trade barriers; difficulties in collecting accounts receivable; potential adverse tax consequences; uncertainties of laws and enforcement relating to intellectual property and privacy rights; unauthorized copying of software; difficulty in managing a geographically dispersed workforce in compliance with diverse local laws and customs; and other factors, depending upon the country involved. There can be no assurance that the Company will not experience these factors in the future. If foreign operations expand to the point where they account for a significant portion of the Company’s consolidated revenues, the presence of such factors could have a material adverse effect on the Company’s business, operating results and financial condition. Reliance on Key Personnel Absolute’s future performance depends in part upon attracting and retaining key technical, sales and management personnel. There can be no assurance that Absolute can retain these personnel and continue to recruit required talent. The loss of the services of Absolute’s key employees could have a material adverse effect on Absolute’s business, operating results and financial condition. 32
  • 35. Absolute Software 2008 Annual Report Foreign Exchange The Company’s reporting and functional currency is the Canadian dollar. However, over 90% of the Company’s sales, compared to approximately 50% of costs, are denominated in U.S. dollars. As a result, the Company is exposed to fluctuations in the Canadian and U.S. dollar exchange rate for which it has not entered into foreign exchange hedges. Should the Canadian dollar significantly appreciate relative to the U.S. dollar, then it could impede Absolute’s ability to meet its Canadian dollar sales contract growth and margin targets. Fluctuation of Quarterly Results and Failure to Meet the Expectations of Analysts or Investors Absolute’s quarterly operating results are likely to fluctuate, and if Absolute fails to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Moreover, the stock price may be based on expectations of our future performance that may be unrealistic or that may not be met. Absolute believes that quarter-to-quarter comparisons of our results should not necessarily be relied upon as a reliable indicator of future performance. The Effect of Amortization of Revenue Over the Term of the Subscription Absolute generally recognizes revenue from customer subscriptions ratably over the terms of the Sales Contracts. The average term is approximately 30 months, although terms can range from one year to as much as five years. As a result, most of the revenue we report in each quarter results from the recognition of deferred revenue relating to Sales Contracts entered into during previous periods. Consequently, a decline in new or renewal subscriptions in any one quarter will not necessarily be fully reflected in the revenue in that quarter but will negatively affect revenue in future quarters. In addition, Absolute may be unable to adjust its cost structure to reflect the changes in Sales Contracts. Accordingly, the effect of significant downturns in sales and market acceptance of our service may not be fully reflected in Absolute’s results of operations until future periods. Our subscription model also makes it difficult to rapidly increase revenue through additional sales in any period, as revenue from new customers must be deferred and recognized over the applicable subscription term. Sales Contracts Management considers Sales Contracts to be one of the key financial performance indicators for the Company. Most Sales Contracts (>90%) are conducted via channel partners who purchase from Absolute in order to resell to their customers. While Absolute’s services are provided directly to the end user customer, the orders, which include ship dates, customer name, product, pricing and volume, come in various forms from the reseller partner (sales reports, purchase orders, shipping reports, royalty reports, etc.). Absolute ships the software, commences the subscription term, and invoices the reseller (and receives payment from the reseller) based on receipt of, or ship dates, contained in these forms of evidence of the end customer purchase, and reports this as a Sales Contract for the applicable period. Accordingly, Absolute is relying upon the reseller partner to have sufficiently concluded the sales process with the end user customer to ensure that the order is valid and the risk of returns is kept to a minimum. Historically, Absolute’s experience with returns has corroborated that this reliance is justified. However, it is possible that a reseller may order from us and subsequently return the product in accordance with generally accepted industry return practices. In such cases, if a sale had been reported in a prior period, it would have to be subsequently reversed, impacting future Sales Contracts and revenue performance. However, Absolute does not make a provision against Sales Contracts for potential returns for the following reasons: revenue recognition from Sales Contracts until the month after sale so there would be no income statement impact as a result of such provision; and the revenue recognition term averages around 30 months compared to industry standard return policies which are generally less than 90 days, so any returns are generally accounted for prior to any material recognition of revenue. Accordingly, the effect of any customer returns may not be fully reflected in Sales Contracts and deferred revenue figures until a future period. Income Taxes The Company’s operations are conducted in a number of countries with complex tax legislation and regula- tions pertaining to the Company’s activities. Any reassessment of the Company’s tax fi lings by the tax authorities may result in material adjustments to net income or loss, tax assets and operating loss carryforwards. 33
  • 36. Management’s Discussion & Analysis Securities Analysts The trading market for Absolute’s common stock is in part affected by the research and reports that independent industry or financial analysts publish about Absolute or its business. Absolute does not control these analysts. If one or more of the analysts who publish reports on Absolute were to downgrade Absolute’s stock or lower future stock price targets or estimates of operating results, Absolute’s stock price could be adversely affected. Furthermore, if one or more of these analysts cease coverage of Absolute, the Company could lose visibility in the market which, in turn, could cause Absolute’s stock price to decline. 34
  • 37. Absolute Software 2008 Annual Report Auditors’ Report To the Shareholders of Absolute Software Corporation We have audited the consolidated balance sheets of Absolute Software Corporation as at June 30, 2008 and 2007 and the consolidated statements of operations and deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the fi nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fi nancial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at June 30, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants Vancouver, British Columbia August 6, 2008 35
  • 38. Consolidated Financial Statements ABSOLUTE SOFTWARE CORPORATION Consolidated Balance Sheets Years Ended June 30, 2008 and 2007 (Expressed in Canadian dollars) As at June 30th 2008 2007 $ $ ASSETS CURRENT Cash and cash equivalents (Note 3) 46,460,299 7,779,505 Short-term investments (Note 3) 10,488,167 27,116,968 Accounts receivable, net of allowance for doubtful accounts of $715,000 (2007 – $20,000) 18,396,731 11,656,260 Prepaid expenses and deposits 906,792 785,737 Current portion of deferred contract costs (Note 5) 7,234,859 5,253,390 Current portion of future income tax assets (Note 7) 1,341,691 1,477,516 84,828,539 54,069,376 INVESTMENTS (Note 3) 7,016,074 – DEFERRED CONTRACT COSTS (Note 5) 7,448,945 5,935,111 PROPERTY AND EQUIPMENT (Note 6) 1,971,003 1,204,017 FUTURE INCOME TAX ASSETS (Note 7) 1,512,970 1,377,145 INTANGIBLE ASSET (Note 8) 255,549 383,324 103,033,080 62,968,973 LIABILITIES CURRENT Accounts payable and accrued liabilities 6,240,941 2,171,844 Current portion of accrued warranty (Note 9) 5,448,513 4,586,738 Current portion of deferred revenue (Note 10) 41,675,479 25,483,198 53,364,933 32,241,780 ACCRUED WARRANTY (Note 9) 6,396,080 3,418,312 DEFERRED REVENUE (Note 10) 46,170,998 28,760,618 105,932,011 64,420,710 COMMITMENTS (Note 13) CONTINGENCIES (Note 14) SHAREHOLDERS’ DEFICIENCY Share capital and other equity (Note 11(b)) 41,915,225 39,094,936 Contributed surplus (Note 11(c)) 11,938,462 7,814,428 Deficit (56,752,618) (48,361,101) (2,898,931) (1,451,737) 103,033,080 62,968,973 See accompanying Notes to the Consolidated Financial Statements. Approved on behalf of the Board: John Livingston Ian Reid Director Director 36
  • 39. Absolute Software 2008 Annual Report ABSOLUTE SOFTWARE CORPORATION Consolidated Statements of Operations and Deficit Years Ended June 30, 2008 and 2007 (Expressed in Canadian dollars) 2008 2007 $ $ REVENUE 37,853,404 20,136,048 COST OF GOODS SOLD 11,459,549 6,938,845 GROSS MARGIN 26,393,855 13,197,203 EXPENSES Sales and marketing 18,078,427 10,069,935 Research and development 4,782,038 3,243,833 General and administration 6,686,105 5,202,887 Investment Tax Credits (1,400,000) – Stock-based compensation 4,948,972 951,819 33,095,542 19,468,474 OPERATING LOSS (6,701,687) (6,271,271) OTHER INCOME (EXPENSE) Interest and other income 1,981,835 1,012,415 Interest and bank charges (96,764) (57,440) Foreign exchange loss (805,115) (640,010) Writedown of investment (Note 3) (1,369,786) – (289,830) 314,965 LOSS FOR PERIOD BEFORE INCOME TAXES (6,991,517) (5,956,306) INCOME TAX (EXPENSE) RECOVERY (Note 7) (1,400,000) 80,693 NET LOSS AND COMPREHENSIVE LOSS FOR THE YEAR (8,391,517) (5,875,613) DEFICIT, BEGINNING OF YEAR (48,361,101) (42,485,488) DEFICIT, END OF YEAR (56,752,618) (48,361,101) BASIC AND DILUTED LOSS PER SHARE (0.18) (0.13) WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 47,160,094 44,995,664 See accompanying Notes to the Consolidated Financial Statements. 37
  • 40. Consolidated Financial Statements ABSOLUTE SOFTWARE CORPORATION Consolidated Statements of Cash Flows Years Ended June 30, 2008 and 2007 (Expressed in Canadian dollars) 2008 2007 $ $ OPERATING ACTIVITIES Net loss for the year (8,391,517) (5,875,613) Items not involving cash Amortization of property and equipment 813,597 580,696 Stock-based compensation 4,948,972 951,819 Amortization of intangible asset 127,775 127,774 Future income taxes – (80,693) Writedown of investment (Note 3) 1,369,786 – Change in non-cash operating working capital Accounts receivable (6,740,471) (5,481,091) Prepaid expenses and deposits (121,055) (446,768) Deferred contract costs (3,495,302) (5,349,008) Accounts payable and accrued liabilities 4,069,096 146,453 Accrued warranty 3,839,542 5,084,355 Deferred revenue 33,602,660 27,246,172 CASH FROM OPERATING ACTIVITIES 30,023,083 16,904,096 INVESTING ACTIVITIES Property and equipment purchased (1,580,581) (1,069,367) Proceeds from maturities of short-term investments 31,672,314 23,115,456 Purchases of short-term investments (16,413,299) (37,526,970) Purchases of investments (7,016,074) – CASH FROM (USED IN) INVESTING ACTIVITIES 6,662,360 (15,480,881) FINANCING ACTIVITIES Loans to directors and employees collected – 1,108,402 Issuance of common shares 1,995,351 1,266,207 CASH FROM FINANCING ACTIVITIES 1,995,351 2,374,609 NET CASH INFLOW 38,680,794 3,797,824 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,779,505 3,981,681 CASH AND CASH EQUIVALENTS, END OF YEAR 46,460,299 7,779,505 COMPOSITION OF CASH AND CASH EQUIVALENTS: Cash 3,472,324 5,621,550 Cash equivalents 42,987,975 2,157,955 46,460,299 7,779,505 SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid – – Interest and bank charges paid 96,764 57,440 See accompanying Notes to the Consolidated Financial Statements. 38
  • 41. Absolute Software 2008 Annual Report Notes to Consolidated Financial Statements Years Ended June 30, 2008 and 2007 (Expressed in Canadian dollars) . ORGANIZATION The principal business activities of the Company since incorporation under the Company Act (British Columbia) on November 24, 1993 are the development, marketing and support of computer security and asset management services and products. All of the Company’s services and products are powered by its proprietary and patented Computrace software system. The Company markets its services and products through computer original equipment manufacturers (“OEMs”), value-added resellers and directly to customers including corporations, governments, educational institutions and consumers. While the Company’s products are available interna- tionally through resellers in Europe, Australia, South Africa and South America, a majority of its sales are generated in North America. The Company trades on the TSX under the symbol “ABT”. . SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The consolidated fi nancial statements include the accounts of Absolute Software Corporation and its wholly owned subsidiaries: Absolute Software, Inc. (U.S.), Computer Recovery, Inc. (U.S.), Absolute Software EMEA Ltd. (U.K.) and 609713 B.C. Limited. All intercompany balances and transactions have been eliminated upon consolidation. (b) Adoption of New Accounting Standards On July 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants Handbook Section 1530, “Comprehensive Income”; Section 3251, “Equity”; Section 3855, “Financial Instruments – Recognition and Measurement”; Section 3861, “Financial Instruments – Disclosure and Presentation” and Section 3865, “Hedges”. Section 3855 prescribes when a financial asset, financial liability or non-financial derivative is to be recognized on the balance sheet, and the amount at which these items should be recorded. Under the new standard, financial instruments must be classified into one of these five categories: held-for-trading, held-to- maturity, loans and receivables, available-for-sale or other financial liabilities. All financial instruments, including derivatives, are measured in the balance sheet at fair value except for loans and receivables, held-to- maturity investments and other financial liabilities, which are measured at amortized cost. Subsequent measurement and the accounting for changes in fair value will depend on their initial classification. Upon the adoption of these new standards, the Company designated its cash and cash equivalents and investments as held for trading which are recorded at fair value, with changes in fair value being recognized in operations immediately. Short-term investments were designated as held-to-maturity, which are measured at amortized cost using the effective interest rate method. Accounts receivables are classified as loans and receivables, which are measured at amortized cost using the effective interest rate method. Accounts payable and accrued liabilities are classified as other financial liabilities, which are measured at amortized cost using the effective interest rate method. Transaction costs incurred to acquire financial assets are included in the underlying balance. Upon adoption of these standards, the Company had no hedges in effect or components that caused comprehensive income to differ materially from the Company’s statement of operations. The adoption of these standards did not result in any material impact on the Company’s financial statements. 39
  • 42. Notes to Consolidated Financial Statements . SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Significant Accounting Policies Foreign currency translation The Company’s functional currency is the Canadian dollar. Transaction amounts denominated in foreign currencies (currencies other than Canadian dollars) are translated into Canadian dollars at exchange rates prevailing at the transaction dates. Carrying values of non-Canadian dollar monetary assets and liabilities are adjusted at each balance sheet date to reflect the Canadian exchange rate prevailing at that date. Gains and losses arising from translation of foreign currency monetary assets and liabilities at each period end are included in operations. The accounts of subsidiaries, not reporting in Canadian dollars, and which are integrated operations, are translated into Canadian dollars using the temporal method. Under this method, monetary assets and liabilities of foreign subsidiaries are translated at exchange rates in effect at the end of each period and non- monetary assets and liabilities are translated using historical exchange rates. Revenues and expenses are translated at the average exchange rate for the period, which approximates rates in effect on the date of the transaction. Foreign currency transaction gains and losses are included in operations. Use of estimates The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent liabilities during the period. Assessment of the carrying values of allowances for accounts receivable, and valuation of stock-based compensation, warrants, accrued warranty, and future income tax assets are significant areas requiring the use of estimates. Actual results may differ from the estimates used in the preparation of the financial statements. Cash and cash equivalents, short-term investments and investments Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest-bearing securities with maturities at the date of purchase of three months or less. Investments in these held-to-maturity securities are classified as Cash and Cash Equivalents, or Short-Term Investments on the balance sheet, are carried at amortized cost, and are translated at exchange rates in effect on the balance sheet date. Investments in marketable and other securities held for trading are classified as Investments on the balance sheet, are held for trading, and are carried at market value on the balance sheet date with gains and losses recorded in the income statement. The Company assesses declines in the value of individual held-to-maturity investments for impairment to determine whether the decline is other than temporary, in which case the investment is written down and the resulting loss recorded in the income statement. Deferred contract costs The Company sells service contracts (referred to as “Sales Contracts”) with monitoring and theft recovery terms ranging from one to five years, the average term for which has historically been approximately 30 months. Certain direct contract costs associated with Sales Contracts are deferred and amortized ratably over the contract term. These deferred contract costs are generally comprised of incremental prepaid employee sales commissions and accrued warranty expenses. Other costs, such as selling and marketing, development, and new customer training and delivery, which are incurred to generate overall Sales Contracts, are expensed in the period in which they are incurred. Property and equipment Property and equipment are carried at cost less accumulated amortization. Amortization is calculated using the straight line method from the month of purchase over the following estimated useful lives: Asset Rate Computer equipment 3 years Furniture and equipment 5 years Computer software 1 year Office equipment 3 years Trade show equipment 2 years Leasehold improvements Term of the lease 40
  • 43. Absolute Software 2008 Annual Report Property and equipment assets are reviewed for impairment when events or changes in circumstances indicate that its carrying value may not be recovered. If estimates of future cash flows expected to result from the use of the asset are less than the carrying value, then the carrying value is written down to its fair value, based on the related estimated discounted future cash flows. Intangible asset The intangible asset relates to the value attributed to common share purchase warrants issued for acquisition of the rights to the “Lojack” brand name for use with Absolute’s consumer products. It is carried at cost less accumulated amortization. Amortization is calculated on a straight line basis over a five-year period. The intangible asset is reviewed for impairment when events or changes in circumstances indicate that its carrying value may not be recovered. If estimates of future cash flows expected to result from the use of the asset are less than the carrying value, then the carrying value is written down to its fair value, based on the related estimated discounted future cash flows. Future income tax assets and income taxes The Company follows the asset and liability method for accounting for income taxes. Under this method, future income taxes are recognized for the future income tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases (temporary differences). Changes in the net future tax asset or liability are included in operations. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the period that includes the substantive enactment date. Future income tax assets are evaluated and if realization is not considered more likely than not, a valuation allowance is provided for all or a portion of the value. Deferred revenue and revenue recognition A majority of the Company’s revenue is from subscriptions (of Sales Contracts) to computer theft recovery and secure asset tracking services with subscription terms ranging from one to five years. The full value of each Sales Contract is invoiced and receivable (payable within industry standard invoice terms) upon signing the contract, and is non-refundable. However, these sales are comprised of multiple elements, including software, monitoring, theft recovery and maintenance services over the term, which are not separable for accounting purposes. As a result, the revenue from these contracts is recorded as deferred revenue on the balance sheet and is amortized to monitoring revenue ratably over the contract term. Amortization of sales contracts to revenue commences in the month after sale. A portion of the associated direct costs, such as commissions and warranty accruals, are also deferred and expensed ratably over the contract term to match the revenue recognition. The Company completes a majority of its Sales Contracts through OEM and reseller partners, a majority of which are in North America. All Sales Contracts are recorded at the net sale amount received by Absolute from the reseller, provided that all significant contractual obligations have been satisfied and collection is reasonably assured. For direct sales, the Sales Contract is recorded at the sale amount received direct from the customer. Accrued warranty and guarantee The Company offers a recovery guarantee, or warranty, on certain premium versions of its theft recovery subscriptions. If a computer equipped with a product that includes the recovery guarantee is stolen, and the Company is unable to physically recover the stolen computer using its Computrace software system, or to delete data on the stolen computer, then the customer may be eligible for a warranty payment of up to $1,000. In order to qualify for the warranty, the customer must comply with the Company’s terms and conditions, including the fi ling of a police report. The amount of the warranty payment decreases in each subsequent year of service and is also limited by the value of the stolen computer. The Company estimates the full value of the potential warranty liability based on historic computer theft and theft recovery rates, and records the entire accrual amount in Accrued Warranty at the beginning of the contract term, with the related expense charged to Deferred Costs and amortized to cost of sales ratably over the term of the Sales Contract. The accrual balance is drawn down by net guarantee payments and if required is adjusted for experience on a periodic basis. 41
  • 44. Notes to Consolidated Financial Statements . SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Significant Accounting Policies (continued) Research and development costs Research costs are charged to expense in the year in which they are incurred. Development costs are deferred if they meet specific criteria, otherwise they are expensed as incurred. At June 30, 2008 and 2007, no development costs have been deferred. Stock-based compensation plans The fair value method of accounting is used for stock-based awards. Under this method, the compensation cost of options and other stock-based compensation arrangements is recorded based on the estimated fair values at the grant date and charged to earnings over the vesting period. Loss per share Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the treasury stock method. Under the treasury stock method, the weighted average number of common shares outstanding assumes that all dilutive options and warrants were exercised at the beginning of the period, and proceeds were applied to repurchase common shares at the average market price for the period. (d) Recent Accounting Pronouncements Goodwill and Intangible Assets In February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062. This new standard provides guidance on the recognition, measurement, presentation and disclosure of goodwill and intangible assets and is effective for the Company beginning July 1, 2009. Adoption of International Financial Reporting Standards (IFRS) The CICA plans to converge Canadian GAAP with IFRS over a transition period expected to end in 2011. The Company is currently assessing the future impact of these new standards on its financial statements. . CASH AND CASH EQUIVALENTS, SHORT-TERM INVESTMENTS AND INVESTMENTS The components of the Company’s cash and cash equivalents and investments balances are as follows: Cost and Recorded Basis Allocation for Balance Sheet Cash Unrealized Recorded & Cash Short-Term Long-Term Cost Basis Losses Basis Equivalents Investments Investments $ $ $ $ $ $ As at June 30, 2008 Bank balances and term deposits 46,746,913 46,746,913 46,460,299 286,614 Non-government ABCP 2,108,000 (843,200) 1,264,800 1,264,800 Investment grade securities 14,045,376 14,045,376 8,294,102 5,751,274 Marketable securities 2,434,037 (526,586) 1,907,451 1,907,451 65,334,326 (1,369,786) 63,964,540 46,460,299 10,488,167 7,016,074 As at June 30, 2007 Bank balances 7,903,429 7,903,429 7,779,505 123,924 Non-government ABCP 2,108,000 2,108,000 2,108,000 Investment grade securities 24,885,044 24,885,044 24,885,044 34,896,473 – 34,896,473 7,779,505 27,116,968 – 42
  • 45. Absolute Software 2008 Annual Report Included in short-term investments and investments is $3.2 million (net of a $1.4 million writedown) of Canadian non-bank third-party Asset Backed Commercial Paper (“ABCP”) and other marketable securities that are held for sale. The ABCP was rated R1 (High) by Dominion Bond Rating Service at the time of purchase. On March 20, 2008, the pan-Canadian restructuring committee issued an Information Statement containing details about the proposed restructuring. Based on this and other public information it is estimated that 93% of the Company’s initial investment will be replaced by A-1 and A-2 notes which are expected to obtain a AA rating and have maturities up to nine years. The Company has taken a 40% writedown on the original investment which is the Company’s estimate of fair value based on publicly available information. Continuing uncertainties regarding the value of the assets which underlie the ABCP and other marketable securities, the amount and timing of cash flows and the outcome of the restructuring process could give rise to a further change in the value of the Company’s investments which would impact the Company’s earnings. . FINANCIAL INSTRUMENTS (a) Fair Values in Financial Statements The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, investments, accounts payable and accrued liabilities approximate their fair values due to either their short-term maturity, or the fact that they have been valued at market. The carrying value of the warranty liability is higher than its fair value due to the fact that the payments will be made over time and the liability is not discounted to present value. (b) Foreign Currency Risk Sales contracts billed in U.S. dollars by the Company are recorded at the exchange rate in effect at the time of sale, and are collected on standard trade payable terms. Excess U.S. dollar balances are converted into Canadian dollars on a regular basis. The Company typically does not enter foreign currency hedges. Further devaluation in the U.S. dollar relative to the Canadian dollar could impact the Company’s ability to continue at current sales growth rates and margins as more than 90% of Sales Contracts and 50% of costs are denominated in U.S. dollars. (c) Credit Risk The Company is subject to routine credit risk. Bad debt experience has not been significant although the allowance has been increased in fiscal 2008 in light of current economic conditions. A majority of cash and cash equivalents, short-term investments and investments are held in high-quality financial instruments to mitigate exposure to credit risk. . DEFERRED CONTRACT COSTS 2008 2007 $ $ Prepaid sales commissions 6,081,205 4,462,754 Accrued warranty 8,384,144 6,564,461 Other prepaid / accrued contract costs 218,455 161,286 Balance, end of year 14,683,804 11,188,501 Less: Current portion (7,234,859) (5,253,390) Long-term portion 7,448,945 5,935,111 43
  • 46. Notes to Consolidated Financial Statements . PROPERTY AND EQUIPMENT 2008 Accumulated Cost Amortization Net Book Value $ $ $ Computer equipment 2,903,868 1,911,742 992,126 Furniture and equipment 1,060,771 688,219 372,552 Computer software 1,370,187 1,214,686 155,501 Office equipment 654,983 360,301 294,682 Trade show equipment 68,665 54,105 14,560 Leasehold improvements 271,444 129,862 141,582 6,329,918 4,358,915 1,971,003 2007 Accumulated Cost Amortization Net Book Value $ $ $ Computer equipment 2,296,615 1,568,683 727,932 Furniture and equipment 667,532 633,124 34,408 Computer software 1,110,838 888,874 221,964 Office equipment 463,715 269,137 194,578 Trade show equipment 68,665 43,530 25,135 Leasehold improvements 129,862 129,862 – 4,737,227 3,533,210 1,204,017 . FUTURE INCOME TAX ASSETS Income tax expense (recovery) for the years ended June 30, 2008 and 2007 differ from that calculated by applying statutory rates for the following reasons: 2008 2007 $ $ Combined Canadian federal and provincial income tax recoveries at expected rate of 32.81% (2007 – 34.86%) (2,293,917) (2,076,368) Permanent differences 2,185,477 901,581 Foreign tax losses effected at lower rates (80,282) 28,499 Benefit of previously unrecognized tax losses 1,588,722 1,065,595 1,400,000 (80,693) The income tax expense was offset by a $1.4 million tax recovery for the value of the Canadian Investment Tax Credits (“ITCs”). These ITCs were credited against operating expenses, as the credit is generated by certain eligible research and development expenditures. Further ITCs are expected in future periods, but at a lower value as the fiscal 2008 amount includes a cumulative credit from prior years. In prior periods, management deemed it less likely that these credits would be realized. 44
  • 47. Absolute Software 2008 Annual Report The tax effect of the significant temporary differences that comprise future income tax assets and liabilities at June 30, 2008 and 2007 are as follows: 2008 2007 $ $ Future tax assets (liabilities): Deferred contract costs (2,393,631) (1,179,163) Investments 178,072 – Property and equipment 475,518 655,534 Deferred revenue 9,347,356 2,847,564 Operating loss carryforwards 3,567,530 5,226,712 Scientific research and experimental development expenditure carryforwards 240,221 2,254,158 Accrued warranty 3,392,465 2,285,047 Unrealized foreign exchange loss – 464,752 Other 339,130 250,456 Total future tax assets 15,146,661 12,805,060 Valuation allowance (12,292,000) (9,950,399) Balance, end of year 2,854,661 2,854,661 Less: current portion 1,341,691 1,477,516 Net future income tax assets 1,512,970 1,377,145 In assessing the realizability of future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The amount of the future tax asset considered realizable could change materially in the near term based on future taxable income during the carryforward period. The Company has available federal and provincial scientific research and experimental development investment tax credits of approximately $700,000 that may be applied to reduce future tax liabilities. The investment tax credits expire in 2009 to 2014. In addition, the Company has approximately $US9.3 million of net operating loss carryforwards available for U.S. income tax purposes to reduce taxable income of future years that expire in fiscal years ending June 30, 2019 through 2026. The Company’s operations are conducted in a number of countries with complex tax legislation and regulations pertaining to the Company’s activities. Any reassessment of the Company’s tax fi lings by the tax authorities may result in material adjustments to net income or loss, tax assets and operating loss carryforwards. . INTANGIBLE ASSET During fiscal 2006, the Company acquired an intangible asset relating to the acquisition of the worldwide rights to brand its consumer offering “LoJack for Laptops” for a ten-year period ending June 30, 2015. In addition to an annual and per unit royalty, Absolute issued one million common share purchase warrants to LoJack Operating Company L.P. The fair value of each warrant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.25%, dividend yield of 0%, expected life of five years, and volatility of 77%. 2008 2007 $ $ Balance, beginning of year 383,324 511,098 Less: Amortization (127,775) (127,774) Balance, end of year 255,549 383,324 45
  • 48. Notes to Consolidated Financial Statements . ACCRUED WARRANTY AND GUARANTEE Upon signing sales contracts that include the recovery guarantee (see Note 2(c)), the Company estimates the full cost and potential warranty claims during the term of each contract. The average accrual rate in the warranty balance is $3.36 per unit per year (2007 – $3.75 per unit per year). This amount is estimated based on the Company’s actual theft recovery and loss experience, and is accrued as a liability in the financial statements with the offsetting charge to deferred contract costs and amortized to cost of sales over the term of the contract. At June 30, 2008 and 2007, the accrued warranty is as follows: 2008 2007 $ $ Balance, beginning of year 8,005,050 2,920,695 Warranty accrual on new sales contracts 4,907,939 5,595,019 Warranty claims paid (1,068,396) (876,647) Insurance premiums paid, net of insurance proceeds – 365,983 Balance, end of year 11,844,593 8,005,050 Less: Current portion (5,448,513) (4,586,738) Long-term portion 6,396,080 3,418,312 . DEFERRED REVENUE Deferred revenue is comprised of invoiced and prepaid Sales Contracts from current and prior periods that have yet to be recognized as revenue (see Note 2 (c)). The following table provides a reconciliation of deferred revenue balances to Sales Contracts and revenue: 2008 2007 $ $ Balance at the beginning of the year 54,243,816 26,997,644 Add: Sales Contracts during the year 72,452,073 47,276,169 Less: Revenue recognized during the year (37,853,404) (20,136,048) Less: Other adjustments (996,008) 106,051 Balance at the end of the year 87,846,477 54,243,816 Less: Current portion (41,675,479) (25,483,198) Long-term portion 46,170,998 28,760,618 . SHAREHOLDERS’ EQUITY (a) Authorized 100,000,000 common shares, no par value Unlimited preferred shares, Series A, voting, convertible, redeemable (b) Issued Number of Number of Amount Common Shares Warrants $ Balance at June 30, 2006 43,985,360 1,112,686 37,026,188 Shares issued on options exercised 1,594,972 – 1,386,744 Shares issued under Employee Share Purchase Plan 215,960 – 275,349 Shares issued on warrants exercised (e) 312,686 (312,686) 406,655 Balance at June 30, 2007 46,108,978 800,000 39,094,936 Shares issued on options exercised 1,411,568 – 2,082,424 Shares issued under Employee Share Purchase Plan 91,024 – 537,865 Shares issued on warrants exercised (e) 200,000 (200,000) 200,000 Balance at June 30, 2008 47,811,570 600,000 41,915,225 46
  • 49. Absolute Software 2008 Annual Report (c) Contributed Surplus 2008 2007 $ $ Contributed surplus, beginning of year 7,814,428 7,665,150 Stock-based compensation expense recorded on Option and Purchase Plans (see Note 2 (c)) 4,948,972 951,819 Transfer to share capital on exercise of options and warrants (824,938) (802,541) Contributed surplus, end of year 11,938,462 7,814,428 (d) Stock Options and Employee Share Purchase Plan The Company’s stock-based compensation plans include an Employee Stock Option Plan (“Option Plan”) and an Employee Share Purchase Plan (“Purchase Plan”). For both plans, the Company records the estimated fair value of the stock-based awards as compensation expense over the benefit period with a corresponding credit to contributed surplus. Any consideration paid by employees on exercise of share options or purchase of shares, together with the amount initially recorded in contributed surplus, is credited to share capital. The 2001 Employee Share Option Plan initially provided for a maximum of 4,065,206 common shares to be allocated to participants. During fi scal 2007, the Company’s shareholders approved a resolution to change that maximum share figure to a rolling maximum of 15% of the number of common shares outstanding immediately before the grant of the applicable option. On this basis, the maximum common shares available under the Option Plan was 7,171,735 at June 30, 2008, of which 1,002,325 remain ungranted. The exercise price of each option equals the last closing market price of the Company’s shares before the grant date. The term of option grants will not exceed ten years from the date of grant of the option. Generally, options are granted with a four-year vesting period (25% vesting on each anniversary date), and expire two years after each vesting date. The Company’s Employee Share Purchase Plan allows employees to purchase up to two million common shares from treasury at a 15% discount from the market price. Employees may allocate a maximum of $10,500 per year to the purchase of common shares from treasury through two six-month offering periods per year. During fiscal 2008, 91,024 (2007 – 107,980) common shares were issued from treasury under the Plan at a weighted average price of $5.91 (2007 – $2.55) per share. A summary of the status of the Company’s stock option plan as of June 30, 2008 and 2007 is presented below: June 30, 2008 June 30, 2007 Weighted Weighted Average Average Number Exercise Price Number Exercise Price of Shares $ of Shares $ Share options outstanding, beginning of year 5,228,028 4.07 4,926,500 0.76 Exercised (1,411,568) 0.89 (1,594,972) 0.45 Forfeited (306,000) 9.83 (287,500) 1.40 Granted during the year 2,658,950 14.28 2,184,000 8.55 Outstanding, end of year 6,169,410 8.92 5,228,028 4.07 47
  • 50. Notes to Consolidated Financial Statements . SHAREHOLDERS’ EQUITY (continued) (d) Stock Options and Employee Share Purchase Plan (continued) Options Outstanding at Options Exercisable at June 30, 2008 June 30, 2008 Weighted Average Weighted Weighted Number of Remaining Average Number of Average Stock Options Contractual Exercise Price Stock Options Exercise Price Exercise Prices Outstanding Life (years) $ Exercisable $ $15.00 to 20.00 645,000 3.87 19.18 – – 10.00 to 14.99 2,978,450 3.79 12.29 261,000 11.60 5.00 to 9.99 291,000 3.28 8.66 72,750 8.66 1.50 to 4.99 944,500 2.65 2.54 340,313 2.25 0.50 to 1.49 924,000 1.74 1.12 528,625 1.06 0.13 to 0.49 386,460 1.11 0.22 367,398 0.22 6,169,410 3.13 8.92 1,570,086 3.23 Stock-based compensation The Company uses the Black-Scholes option pricing model to measure the fair-value of employee stock options on the option grant date. The fair value of the stock options is then charged to income ratably over the option vesting period. This resulted in a total of $4,819,000 (2007 – $887,000) of stock-based compensation expense recorded in operations for the year ended June 30, 2008. The assumptions used in the Black-Scholes model are: no dividends are to be paid, a weighted average volatility of the Company’s share price of 60% (2007 – 60% to 71%), an annual risk-free interest rate of 3.25 – 4.75% (2007 – 4.5%) and an expected average life of three years (2007 – three years to four years). For the Employee Share Purchase Plan, the stock-based compensation charge is determined by the difference between the share purchase price and market price at the start of each purchase period. Th is resulted in a stock-based compensation charge of $130,000 (2007 – $65,000) recorded in operations for the year ended June 30, 2008. (e) Branding Warrants During fiscal 2006, the Company issued one million common share purchase warrants in connection with a ten-year branding agreement entered into with LoJack Operating Company L.P. whereby the Company acquired the rights to use the “LoJack®” brand name for its consumer theft recovery products. Each warrant is exercisable for one common share at an exercise price of $1.00 per share. The warrants vest 20% per year on June 30, 2006, 2007, 2008, 2009 and May 31, 2010. All unexercised warrants expire the earlier of two years after the vesting date, June 30, 2010 or on termination of the agreement. As of June 30, 2008, 400,000 of the warrants have been exercised. (f) Share Split On December 14, 2007, shareholders approved a two-for-one share split for its common shares eff ective as of the close of business on January 4, 2008. All share and per share information included in the con- solidated fi nancial statements and accompanying notes have been adjusted to reflect this share split for all periods presented. 48
  • 51. Absolute Software 2008 Annual Report . SEGMENTED INFORMATION The Company carries on business in the computer security monitoring industry and all sales are made in this segment. Geographic revenue information is based on the location of the customer invoiced. Long-lived assets include property and equipment and intangible assets. 2008 2007 $ $ Revenue United States 35,712,148 18,861,927 Canada and the rest of the world 2,141,256 1,274,121 Total 37,853,404 20,136,048 Long-Lived Assets Canada 2,158,666 1,524,966 United States and the rest of the world 67,886 62,375 Total 2,226,552 1,587,341 . COMMITMENTS The Company has future minimum payments under operating leases to November 30, 2013, and under a branding agreement to June 30, 2015 (Note 8) as follows: Year ending June 30 $ 2009 1,272,235 2010 1,407,488 2011 1,362,156 2012 1,382,052 2013 1,381,796 Future years 744,507 7,550,234 . CONTINGENCIES By virtue of its patent portfolio, Absolute has been the initiating party with respect to assertions and claims of patent infringement in two current cases. In one case initiated by Absolute, Absolute Software, Inc. v. Stealth Signal, Inc. (USDC Southern District of Texas – Case No. H-05-1416), as a result of a counterclaim in that suit, Absolute is also defendant to a patent infringement claim. Stealth Signal, Inc. (“Stealth”), in an attempt to defend against Absolute’s action, obtained a license to a third-party patent and has asserted a counterclaim alleging that Absolute is infringing this third-party patent. Management and its expert advisors believe strongly that the counterclaim is without merit and, accordingly, no provision or contingency has been recorded in the financial statements. While management firmly believes that Absolute will ultimately prevail in these two cases, the outcome, time to resolution and impact on Absolute’s business and patent portfolio, if any, cannot be determined at this time. The actual resolution of any matter before the courts, whether at a final or interlocutory stage, may differ materially as a result of future rulings issued by such courts; therefore, as additional information becomes available, management continually reassesses the potential liability relating to pending litigation, if any. 49
  • 52. BOARD OF DIRECTORS CORPORATE INFORMATION John Livingston Chairman and Chief Executive Officer Auditors Absolute Software Corporation Deloitte & Touche LLP Vancouver, BC Vancouver, BC Christian Cotichini Vancouver, BC Trust Agent CIBC Mellon Trust Phil Gardner www.cibcmellon.com Woodbury, Minnesota Toronto, ON Terry Libin** Calgary, AB Legal Counsel Lang Michener Ian Reid* Vancouver, BC Vancouver, BC Common Shares OFFICERS AND Absolute Software common shares are traded on SENIOR MANAGEMENT the Toronto Stock Exchange (TSX) under the John Livingston trading symbol ABT. Chairman and Chief Executive Officer Phil Gardner ADDITIONAL INFORMATION Chief Technology Officer Rob Chase – Chief Financial Officer (604) 730-9851 ext 119 Rob Chase rchase@absolute.com Chief Financial Officer Carter McCrary Annual General Meeting Chief Operating Officer 10:00 am (P.T.), Tuesday December 16, 2008 Richard Cohen at Terminal City Club in Vancouver, BC Senior Vice President, Business Development ©2008 Absolute Software Corporation. Mark Grace All rights reserved. Computrace and Absolute Vice President, Consumer Business are registered trademarks of Absolute Software Corporation. LoJack is a registered trademark Jim MacCallum Vice President, Finance of LoJack Corporation, used under license by Absolute Software Corporation. LoJack Gareth Mason Corporation is not responsible for any content Vice President Service Delivery herein. All other trademarks are property of William H. Pound their respective owners. Computrace Vice President, Global Corporate Development U.S. patents No. 5,715,174, No. 5,764,892, No. 5,802,280, No. 5,896,497, No. 6,244,758, John Sarantakes No. 6,269,392, No. 6,300,863, and Vice President, North American Sales No. 6,507,914. Canadian patent No. 2,205,370, and 2,284,806. U.K. patents No. EP793823 * Chairman of Compensation Committee and No. GB2338101. German patent and Audit Committee No. 695 125 34.6-08. Australian patent ** Chairman of Strategic Planning Committee No. 699045. Japanese patent No. JP4067035 Design and production by Equicom, a TMX Group Company.
  • 53. Corporate Headquarters Suite 1600, Four Bentall Centre 1055 Dunsmuir Street PO Box 49211 Vancouver, BC Canada V7X 1K8 Tel: 1.800.220.0733 or 604.730.9851 Fax: 604.730.2621 www.absolute.com U.S. Headquarters Absolute Software, Inc. Suite 900, 10900 NE 8th Street Bellevue, Washington USA 98004 Tel: 1.800.220.0733 European Headquarters Absolute Software EMEA Limited 78 Bartholomew Street Newbury, Berkshire RG14 7AB Tel: +44 (0) 1635.30424 Fax: +44 (0) 1635.30687 info@emeaabsolute.com

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